Georgette Blau hired a friend to help her growing business. It was easy. A few years into her building On Location Tours, a sightseeing business with brands including the Sopranos Tour, it was still a relatively small operation in New York City, with four full-time employees and about 16 part-time guides. As the company expanded, Blau decided to bring on someone to help with operations. "She had a great personality and a
lot of energy and worked in tourism, and she understood a lot about operations," she says.

Blau soon realized she'd made the wrong decision. The friend began making unauthorized charges on the company credit card--not for herself, but not budgeted either. There was dissension in the staff. But Blau delayed firing her. "Because I was a new business owner, the actual firing not only took me longer, but I was also second-guessing myself that I hadn't seen the signs," she says. "I was angry at myself." The friendship terminated immediately too.

She shouldn't be so hard on herself. It's perfectly natural and common, especially in launch phase, to hire buddies for crucial roles. After all, these are people you know and trust; they've seen your passion. But if they aren't measuring up as employees, they can also take a professional and emotional toll, not to mention damage your business.

Having to fire a friend is a critical test, according to Robert Bruner of the University of Virginia's Darden School of Business. "It is often remembered as one of the pivotal events in the development of a leader," he says, "because it crystallizes the question: For whom or what do you lead?" Prepare to step up to this leadership challenge, just in case.

It happens to owners, too.

Kathryn Minshew and Alexandra Cavoulacos, co-founders of career site the Muse and former McKinsey consultants, got ousted from a previous startup they'd co-founded with two friends.

Can a close friendship survive a professional breakup? "It's very hard to predict how someone will react when they get fired," says Minshew, who was devastated when the partnership disintegrated. "It depends on so many aspects--that person's personality, and whether they were expecting it or it was a surprise, and how they feel about you or the company's role."

Communication before and after the fact will largely determine how things work out. (She and Cavoulacos are co-authors of The New Rules of Work.) When there are performance issues, "you should give them clear and specific feedback, and then give them a legitimate chance to improve things before you terminate the relationship," says Minshew. But assuming you've already had that conver­sation, you need to articulate the decision. Isolate your role as employer from your role as a friend, but be willing to talk about things later, either as adviser or friend. The more you can be the boss and not the friend, the more likely you will be able to save the friendship.

There are some other critical steps to consider when you need to let a friend go.

Get there before you get here.

Entrepreneurs are inherently optimistic but not always realistic. Be prepared for this situation by planning for a variety of outcomes when you hire a friend. "It's not out of place to use marriage as a metaphor," says Ashley Kelly, a partner in the law firm Arnall Golden Gregory, who specializes in employment law.

Consider it a professional prenup; it can be critical for both partnerships and subordinate relationships. "Particularly when you're dealing with small businesses and entrepreneurial folks who have gone into business together," says Kelly, "promises are often made about equity stakes and future shares, promises that you fully expect to deliver on." In short, be very detailed in the organizational documents on how to measure success; on who gets what and why and when they get it; and on any situations that would change these terms in a significant way, such as a job termination.

Despite having controlling interest in their previous venture, Minshew and Cavoulacos lost the fight but learned much from the experience, which informed how they set up the Muse. They went through every worst-case scenario they could imagine and talked about what might happen, and what the outcomes could be. "We made sure we worked with a lawyer to protect ourselves and the company," says Minshew.

That requires having some of the difficult conversations up front, she admits, but it's easier to have those conversations when your company is just beginning and you're excited about working with someone than it is when you're up and running--and running into trouble.

Don't ignore early warning signs; don't drag it out.

The longer you sidestep the situation, the worse it may become once you get to the point of action. The stress Blau's friend was causing made it feel as though the woman had been working there for years. "But it was only five months," Blau says. And it should have been less.

You've made the decision. Now get ready to take the action.

Make sure you have documented the reason for your decision, says Kelly, "whether it's examples of situations where the skill set wasn't adequate or the performance was subpar."

The hardest part: Be prepared to lose a friend.

You've made a rational business decision, but ultimately it's not just business. Let your friend take the lead on deciding whether the relationship is salvageable, in what form, and after what period of time, says Minshew. Don't try to pretend nothing has happened or insist on continuing the friendship. Something did happen: You made a decision that will improve your business.