Getting the legalities right in your small business can save you tens of thousands of…
Going Into Business With Family or Friends?
Legal considerations when going into business with a friend or family member.
People say that you should not go into business with family or friends. I disagree. I have been in business with my husband for about a decade and a half, and it works really well for us. Friends and family members often know each other very well and often have common interests and complementary expertise. From a business perspective, this can work well. From a legal perspective, it can also work well, and a little thought and planning beforehand can avoid a lot of heartache down the track.
1. Setting expectations.
The most common mistake that I see people making when going into business together is the failure to set realistic or measurable expectations. This error can kill your business (and your relationship).
Case Study: I have a client who co-authored books with a friend of hers. My client was expecting to put in 40 to 50 hours per week on this business, while the friend expected to put in 10 hours. Both agreed that there would be a 50/50 split in the work and the income, but they had not defined what that meant. Needless to say, the business crashed and burned. A lifelong friendship was ruined.
2. Exit strategy.
When planning a joint venture or other business together, I always recommend that you start with the end in mind.
- What happens if one of the business owners wants to leave?
- What happens if one of the business owners dies?
- What happens if you find you simply can’t work together?
By thinking about this upfront, having an exit strategy, the business can be strengthened, and if things do go wrong, the business can continue and without the relationship having to end.
Case Study: My author clients that I spoke about above, had not given any consideration to what would happen if things did not work out. The end of the venture was very messy, and one of the sticking points was who owned the copyright in the books that had been jointly authored. My client had done the bulk of the work. Her friend did not want the jointly authored books sold, which put my client in a difficult position because she was relying on that income. In the end, they agreed that each could reprint and sell the jointly authored books, and keep any money they made from that. If that had been agreed to at the start of the venture, a lot of stress and legal expenses could have been avoided.
3. Talk about money.
Always be clear about money.
- What income streams for the business do you have?
- Who will be responsible for sales?
- Who will set pricing?
- Will the business owners be entitled to be paid for work they do in the business, or will it be strictly profit-sharing?
- What will happen if the business makes a loss?
- If the business makes a profit, how and when will that profit be divided between the business owners?
Many business disputes can be avoided if these questions are addressed before people go into business together. Generally, business disputes occur because of differing expectations, which have never been fully discussed prior to going into business together.
4. Get independent legal advice.
Before going into business with somebody, it really is worth getting independent legal advice. This will make sure that your interests are protected, and that potential legal pitfalls in the business arrangement can be addressed before you start.
Case Study: A client of mine used to operate a gym with her romantic and business partner. Their relationship broke up, and he refused to have anything further to do with the gym, in which he had been a personal trainer. She then had to employ personal trainers to take up the slack. They had both put money into the business and were both 50% shareholders (meaning that they would share any profits equally), but there was no agreement that required him to do any work in the business on an ongoing basis. She had mistakenly thought that he would only get a share of the profits while he continued to assist with running the business.
5. Bottom line.
The bottom line is that going into business with friends and family bears the same amount of legal and commercial risk as any other business relationship. However, when friends and family are involved, emotions can run high, and common sense can sometimes go out the window.
Chances of avoiding the legal dispute are much higher if you agree beforehand on how the business is going to run, who is going to have what responsibility, how the finances will be organised, who will own the intellectual property and what happens when one person leaves.
“The opinions expressed by Smallville Contributors are their own, not those of www.smallville.com.au"
SHARE THIS ARTICLE WITH LIKE MINDED SMALL BUSINESS PEOPLE