A Suggestion or Two on Going into Business with a Friend

You and a friend think you want to go into business together. Maybe you’ve even decided as much–or are at least pretty comfortable with the idea. You feel compatible with one another. He has talents you don’t have. You have talents he doesn’t have. Together you would make a great team. Or would you?

May I make a few suggestions about what you should do before you ink a deal that puts your time, money, and reputation on the line with this would-be partner? And can I say that what I’m about to tell you applies whether or not the potential partner is your brother or sister, your best friend or recent acquaintance, a man or a woman?

1. Act like a banker. If you were going to take out a loan with your local bank, your loan officer would want a loan application, a balance sheet and income statement. She’ll want your last two or three years of tax filings. In some cases, she’ll want a cash flow statement. She’ll pull a credit report. If she’s good, she’ll check you out four ways from Sunday, and finally–if you’re lucky–she’ll have you sign on the dotted line–on the line at the end of a loan agreement and probably on a line at the end of a collateral assignment. And she’ll have some confidence that you’ll pay the loan back because she’s checked you out so thoroughly. IMGP1526

Should you or can you be so thorough with your potential partner? Yes. And he should be with you as well. I know of someone who was about a year into a partnership when he first learned that his partner hadn’t filed his personal income taxes for five years. A couple of years later the tax man (actually woman) descended on the delinquent partner and the firm’s business. The result was ruinous for him and very damaging for the partnership. So, act like a banker and know who you’re dealing with.

2. Go trippin’. Want to know your partner even better? Go on an extended trip with him or her. Doesn’t have to be far, but it should be for at least a week and require you to spend much time together in all sorts of situations, situations that will expose his and your irritating habits. By the time you return, you’ll know how he handles money, whether he’s a penny pincher or a spendthrift. You’ll have a better idea of his character, whether you can trust him to tell the truth or count on him to lie, even about the little things. And you’ll be in a better position to decide if that partnership is such a good idea.

3. Be clear and realistic about profit sharing. Before you go too far, make sure you both are clear about how profits will be distributed. I was partners with my brothers in an insurance agency years ago, an agency where the income flowed completely from commissions. Before we joined forces, we settled on a compensation scheme that we all thought was fair and which we hoped would avoid hard feelings. Basically, we decided to split all commissions three ways. We did this for reasons I won’t go into here. What we didn’t think hard about enough was whether that split would incentivize good work habits, whether it would get us all out the door and seeing the people. I know we all assumed that we would all work equally hard. To put it mildly, that was unrealistic of us.

We were three almost completely different persons. One of us was a great life insurance salesman, an area of relatively high commission per sale. Another was more interested in selling investments, an area where commissions per sale tended to be smaller. And me, I fancied myself a salesman, but I was more of the technician, the behind-the-scenes guy who designed the cases and made sure the details were taken care of. In other words, though are commission split was good in theory–the theory that said we were all going to sell a similar amount of insurance and investments–in practice it was very unrealistic. Problem was that once we started down that road, it was hard to change our arrangement. As a consequence, our partnership was not as profitable as it might have been. So, think about compensation and profit sharing really hard–and be realistic.

5. Vacations and other benefits that can bite you in the rear. As with profit sharing, be very realistic here. Take it as a given that you and your potential partner(s) will come to the table with different expectations about work and play, health insurance and 401(k)s, etc. etc. You all need to be up front and clear about your expectations. If you’re not, trouble will ensue. Count on it.

6. Family matters matter–to some more than others. You have promised your daughter that you’d never miss a single one of her volley ball games while she is high school. Your potential partner hasn’t attended a single baseball game his son has played in. See the problem? If your approaches to family differ significantly, you may want to think twice about going into business together. That should be obvious, but to some it is not.

I could go on and maybe will in another post, but you get the idea: Those planning to go into business with one another need to have multiple intimate conversations about some very important issues. All cards must be on the table before you commit time, money, and reputation to the proposed business venture. All of them. No secrets. None.

You’ll be happier and more successful in the end if that’s the case. Trust me.


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