Are you preparing to start a new business?
If so, you have plenty of company. Start-ups throughout the United States made a big comeback in 2015, reversing a six-year trend, according to the Kauffman Foundation.
Going into business by yourself is challenging enough, and doing so with a partner creates additional challenges--especially if that partner is a close friend. And it's common; about 40% of companies are formed by friends who go into business together, according to a study by the Harvard Business School.
Partnering with a close friend carries a special risk that you should consider before you launch your enterprise: That business stress could destroy your friendship. To reduce this risk and all conflicts with any partner, both of you need to sign an operating agreement right now that clearly defines each of your roles--who's going to be responsible for which aspects of the business. The agreement should also state what you each bring to the firm and its value. One might devote time to the business, while another contributes money or provides key business contacts. Understanding and agreeing with each other's contributions can help you both avoid the feeling that you're being taken advantage of--a common complaint among nascent business partners.
If you can't agree on these issues now--while you're friends full of shared optimism--you shouldn't start a business together.
Is there a way to know which of your friends would make a good business partner? Nothing is certain, but friends who collaborate professionally before starting a company have better chances of success, according to the Harvard study. Clearly, choosing a business partner is almost as important as choosing a spouse.
And what if your business partner is your spouse?
Spouses and life partners can be great business partners; my wife Jean and I are proof. We started Edelman Financial Services 30 years ago, and today it's one of the nation's largest independent financial planning and investment management firms, with more than 500 employees and 42 offices across the country. It was our marriage's strength that allowed us to handle the stresses we experienced in the early years of our business.
Of course, going into business with your spouse can go the opposite way too. Business conflicts can lead to divorce, and divorce can send a business into bankruptcy.
In fact, divorce is indeed guaranteed. Not among married couples who start businesses, mind you, but among every other friendship and partnership that starts one. That's why the operating agreement is so important. Even if you and your business partner remain solid friends forever, the day will come when one of you quits, gets arrested, fails to perform, retires, suffers a disability or dies. So it is guaranteed that the business partnership (not necessarily the friendship) will end at some point. You must anticipate this and plan for it today.
Want an idea of what can happen if you don't? Say you form a business with your friend. You own your share; she owns hers. Later, she dies. Say hello to your new business partner: her husband. Unfortunately, he has never been involved in your business and knows nothing about it. You don't even like him very much. But he now owns half the company.
This is why your agreement must include a buy-sell clause: It dictates what happens to everyone's ownership stakes when ... that day comes. With that clause in place, you secure your right to buy out the husband; without it, very bad things can happen--to all of you.
This raises another issue: Where do you get the money to buy him out when the time comes? But we'll save the answer to that for another column.