When Samantha moved from Boston to Denver to helm the new office of a boutique recruiting firm, one of the first things she did was offer her friend Caitlin, a long-time Denver resident, a job. Though Caitlin didn't have any recruiting experience, she had worked in PR for years, she was great with people, and Samantha knew the two of them would get along. Not only would it be comforting to have a familiar face in the new office, but Samantha was delighted to be able to do something generous for her friend.

While the office was still young, the arrangement worked like a charm. Samantha and Caitlin swapped ideas and information with hardly a trace of office politics and Caitlin was always up for an "unwind margarita" after work. She even helped Samantha find an apartment, introduced her to her Denver friends, and set her up with a gym, a dry cleaner and the best local bakery.

Eventually, and rather unexpectedly, the firm began taking on more and more clients from the health care industry. Before long, they'd won a reputation as the up and coming recruiter in this lucrative field. Samantha had handled health care clients in Boston and adapted to the new direction easily. But Caitlin, whose connections were in media and entertainment, had a harder time keeping up. Though Samantha did what she could to help her friend, feeding her contacts and encouraging her to get out and meet new people, Caitlin seemed uninterested in expanding her knowledge base.

Their office was too small for one recruiter to be slacking off, and it wasn't long before their number of successful placements began to slip. Samantha tried hinting that she wouldn't be offended if Caitlin decided to move on to another job more suited to her background, but Caitlin never took the bait. Soon Samantha's boss back in Denver began pressuring her to either demote Caitlin or replace her with someone better equipped to do the job. Worried about ruining their friendship, Samantha kept putting off the decision.

"Big mistake," she tells me nearly a year later. "My boss came to town that summer and actually insisted on sitting in the room while I fired Caitlin. It was ugly. Caitlin was hurt and furious. I don't know how we'll ever manage to go on being friends."

Many women involved in small businesses wind up hiring their friends or family members. This makes all kinds of sense. Like Samantha, we want to work with those we know and trust, and we also want to help those we care about. But hiring our pals can have both positives and pitfalls, especially as a business begins to grow and make greater demands on its employees. What do you do when it turns out your second cousin or your best friend from 7th grade can't perform on the job?

If you really care about and want to work with your friend, give her a second, even a third chance. Be sure to sit down and discuss any problems right away. Explain clearly where her performance is falling short and give her some ideas about how she might improve things. Given the proper tools and motivation, she may very well rise to the occasion.

If your friend really can't perform her responsibilities, or if the job has outgrown her, don't keep her on just because you've got a history together. You're not doing her any favors by keeping her in a job for which she's not qualified. Chances are you'll only succeed in undermining her confidence. And, as Samantha discovered, avoiding a difficult situation rarely makes it disappear. You will only grow more frustrated with her behavior, and in the long run you risk ruining the friendship for good.

Let her down gently. Explain in detail about the growth of the company and what that means for her position. Let your friend know that she hasn't failed. The job has just become more complicated. Be prepared that she may get defensive or feel betrayed. Be understanding but also be firm. Though she shouldn't feel attacked, she should get a clear message that you need to either shift her to a position of lesser responsibility or let her go.

Ease the transition however possible. Do what you can to help your friend find another job, whether it's introducing her to networking groups or writing letters of recommendation. If you don't feel confident enough in her skills to recommend her, you might suggest business classes or further professional training that could help make her more marketable.

Let your friend know that just because your business relationship didn't work out it doesn't mean the personal relationship is over, too. Give her some time to cool off if she needs it, but be positive about the future. Encourage her to be honest about her feelings and the awkwardness of the situation, and try to do the same yourself. And be sensitive about things like raving about your business successes at the next social gathering.

The two of you may go through a rocky patch, but if you can hang on to whatever originally connected you as people, there's a good chance the relationship will survive.