Finding a business partner whose vision, skills, and personality are compatible with your own can be a monumental challenge. Trust and familiarity play important roles as well, which is one of the reasons why many people consider going into business with family or friends.
This is a great idea on the surface and it does often lead to success. Nevertheless, like all big decisions, starting a business with your nearest and dearest requires careful consideration.
Whilst there is no single recipe for success, our 5 tips below will give you an idea of what you need to think about, and how to avoid the most common pitfalls of working with family or friends.
1. Discuss your vision and expectations
Being clear about your vision from the outset is crucial before going into business with anyone. This will help you to establish whether you all are on the same page.
Sit down together to discuss your goals and expectations in detail. Do they align? If not, can you reach a viable compromise that everyone is happy with?
Establish what each person can bring to the table. Talk about your respective skills, experiences, and knowledge that may be of benefit to the business. Be honest about your strengths and weaknesses.
Discuss what roles, rights, and responsibilities each person wants or expects. Are these expectations fair, reasonable, and practicable?
This first step will help you to establish whether going into business with family or friends has the potential for success. Disagreements are inevitable, and every business carries risk. However, if you’re unable to communicate productively at this initial stage, starting a business together may not be the best idea.
2. Consider the practicalities
You’ll be working with one another on an almost-daily basis for the foreseeable future. This is a lot of time to be spending with the same person, especially if you also live together. Consider whether this is likely to cause any issues.
Unfortunately, compatibility on a personal level does not always translate into good business relations. The nature of your existing relationship will change, so you need to be sure that working together won’t cause irreparable damage to what you already have.
Can you be respectful and understanding of one another’s ideas, opinions, and concerns? Problems will soon arise if, for example, one party expects to make all of the decisions. Family dynamics may come into play here, if you’re dealing with parents or siblings.
It’s also important to discuss other practicalities of starting a business together. For example, how will you manage vacation time or parental responsibilities? Can everyone fully commit to the business and contribute the required resources? Do you have existing jobs that demand a lot of your time?
3. Clarify ownership and roles
Before going into business with family or friends, you will need to decide how much of the business each person will own and control, what everyone’s roles will be, and how profits and losses will be shared.
Perhaps you will split everything equally, or maybe one person will have a bigger ownership stake and more control over the business than others. Whatever the setup, you need to formalise ownership, roles, and responsibilities from the start.
These decisions will depend on a variety of factors, including how much capital, time, and effort each person is going to contribute to the business. Initially, you may find that each person is involved in every aspect of the business, but these blurred lines may lead to confusion and conflict further down the line.
At this stage, you should also think about which legal structure you’re going to use for your new business. You have a few choices, such as setting up a limited company, forming a limited liability partnership (LLP) or limited partnership (LP), or operating as a general partnership.
Each of these business structures provides different features and benefits to suit a variety of circumstances. For example, a company limited by shares and an LLP both allow for equal or varied ownership splits and voting power, but the way in which profit is distributed and taxed differs greatly between the two.
Spend some time researching your options before making a decision. It may be wise to seek professional advice from a solicitor, accountant, or business advisor.
4. Set boundaries
Whilst this may seem unnecessary under the circumstances, you need to establish ground rules and professional boundaries from the get-go, if you’re to stand any chance of making the business work and maintaining harmony in your personal lives.
The most important (and challenging) boundary is leaving personal matters at home and leaving business matters in the workplace. Bringing personal issues into the business, and vice versa, is unhealthy and unproductive. Doing so poses a serious risk to the success of the venture and the state of your relationship with one another.
When setting boundaries, you need to consider relationship dynamics and each person’s existing role within that relationship. For example, one spouse may deal with the financial side of the business, but this does not automatically mean that they get to control the family budget.
Or perhaps you are a confident and assertive individual with leadership experience, whilst your business partner is shy or reserved and more cautious in their approach to decision-making. Without rules and boundaries, you may unwittingly dismiss their ideas, opinions, and expectations in the business, which could soon give rise to tension and resentment.
Friends and family naturally have fewer boundaries than regular work colleagues and business associates, so setting and adhering to boundaries will require a concerted effort. Discuss what is acceptable and unacceptable, set out these rules in writing, and refer to them often to ensure everyone remains in check.
5. Formalise everything in writing
It is tempting to take a more casual approach when going into business with family or friends. You may think that informal chats and verbal agreements will suffice, but this is a dangerous path to tread.
Don’t simply discuss important business affairs in passing and assume everyone is on board. You need to put everything in writing, even the tiniest of details. This will minimise the risk of disagreements in the future.
During conversations, you can’t be certain that the other person is really hearing or understanding what you’re saying or trying to put across. You may not be expressing yourself clearly, they could be distracted or misinterpret your words, and we are all guilty of misremembering and forgetting certain things on occasion.
Create written agreements that document the setup of the business and all decisions that you make, including:
- how much capital each person is investing
- how much of the business everyone owns
- roles and responsibilities
- financial liability
- decision-making powers and procedures
- working hours
- wages and profit sharing
- holiday entitlement
- business rules and boundaries
- dispute resolution procedures
- what happens if one party wants to leave the business
In all likelihood, these things will be set out in a variety of different documents and agreements, such as articles of association, a shareholders’ agreement or partnership/LLP agreement, directors’ service agreements, and employment contracts.
When the business is up and running, you must also record other important decisions you make. Depending on the type of business structure you set up, this may involve keeping meeting minutes, passing and keeping copies of company resolutions, and updating documentation where required (e.g. existing agreements and contracts).
We strongly recommend seeking impartial advice from a solicitor, who can help you to draw up appropriate agreements and contracts that will protect everyone’s interests. Having a trusted external advisor will also be invaluable if you need help to make changes to the business or resolve any disputes further down the line.
Going into business with people you know and trust can be a major advantage, but there’s no guarantee of success, and it is not a decision to be taken lightly.
For some, it may be a recipe for disaster, particularly if you’re unable to be honest and open, communicate effectively, or set clear boundaries.
However, if you feel confident in your ability to follow the tips outlined in this post, working with your nearest and dearest may turn out to be a positive and profitable experience for all parties involved.
If you have any questions about this post, or would like to speak to us about setting up a company, please get in touch or leave a comment below.