Imagine if you and an old college roommate got together for a football weekend at your alma mater. You’re talking over a few beers at a bar after the game and reminiscing about a business idea you discussed 20 years ago before you began your careers.
But no matter how well you work together, before you set out to become the next Ben and Jerry, you need to get some things straight. Put agreements in writing, and think hard about how you’ll work together as a team before you spend time and money building your new business.
Here are some things to think before starting a business with a friend:
1. Take advantage of each other’s enthusiasm.
You and your friend have big dreams, great ideas and share each other’s excitement. It’s a synergy that builds confidence. If you enjoy working together, you may be more likely to get that business off the ground faster. Just make sure you stay focused on the task at hand, and know that many aspects of running a business aren’t fun. Think about how you’ll deal with disagreements, for example, before you start. But stay positive–your friendship can be a big advantage because shared responsibilities can help you reach milestones faster.
2. Remember that you aren’t alone.
Partnerships are statistically much likelier to succeed than sole proprietorships. You will have each other’s experience to rely on for resources, advice and counsel. Just make sure it’s not a one-sided partnership by defining responsibilities at the beginning. Still, flexibility is key. Don’t be afraid to call on your partner when you need help, and make sure you do the same for him or her.
3. Enjoy your freedom.
It can be gratifying to make your own decisions about your career and financial future rather than working to please other people, such as your boss or shareholders. But freedom means different things to different people. Talk to your potential business partner about your working styles in advance, so you know what to expect. Some people do well sitting at a desk during normal business hours, and some do better working from a coffee shop or late at night. Your arrangement is up to you. Just clarify it at the beginning so you know what to expect from your partner.
4. Agree on a definition of success.
You could be satisfied with your income from the business while the same amount of income wouldn’t fulfill your partner’s needs. Work together to create a solid Business Plan. It’s an important step for any business, and can also help you decide if your idea is viable before you invest time and money in developing the business. We can help you get started on your Business Plan at Rocket Lawyer.
5. Take stock of your finances.
Be honest with each other about whether you have the resources to have a real shot at success before you get started. Chances are, you’ll need to do a little fundraising too. Think ahead about applying for business loans and how you’ll seek out other funding sources.
6. Be realistic about your other commitments.
Make sure you have enough free time away from your other work and family commitments for the venture to be successful. You’ll probably work harder than you ever have before, but you also get to reap all of the success. Know from the beginning that starting a business is usually more than a full-time job, and make sure your family knows too. Being an entrepreneur is a big lifestyle change.
7. Put your friendship first.
If it’s more important than the success of the business, that may be a good reason not to go ahead. There will be times that you disagree, and there’s nothing wrong with both having strong opinions. It can be valuable to have multiple perspectives. But when push comes to shove, you have to be able to compromise together, and not take business decisions personally. If you foresee any difficulties making big decisions together, stop before you lose the business and the friendship.
8. Weigh your strengths and potential blind spots.
If both of you are strong in sales and weak in accounting and finance, for example, you may need to hire an accountant and a financial adviser. Be realistic about it from the beginning so you don’t face an expensive surprise down the road, like a big tax bill that could sink the business. Admit that you can’t do everything, so draw on experts when you need them.
9. Pick the appropriate legal structure.
Every business needs a foundation for success, and reducing your personal liability is a must too. Incorporating your new business as an LLC, S-Corp, or C-Corp, for example, can legally separate your personal assets from your business assets. That means if someone sues the business, your family home can be protected. Incorporation also provides tax advantages. Learn more about incorporating your new business at Rocket Lawyer.
10. Plan for a graceful exit.
Although thinking about your exit strategy at the beginning sounds pessimistic, it’s the best time to do it. Work together to create a Buy-Sell Agreement so you can make a smooth transition with no surprises. It can also settle what happens to the business if one of you dies or wants out before the other partner.
Starting a business with a friend can work, but you need to think and plan ahead to protect your dreams, the business, and your families. Remember that it’s a great idea to speak to a business lawyer early on. A lawyer can help you anticipate and plan for many other unknowns, giving your fledgling company a better chance at making it in the long run.