This weekend is my 25-year High School reunion. I’m looking forward to catching up with old mates, listening to stories about how each and every one of us has found our way in life, and contrasting this with what was written by our teachers on our report cards. I remember a conversation from our 20-year reunion where I was asked for my opinion on starting a business with friends.
Being in business with friends is something I know a little bit about, having advised plenty of small businesses run by family and friends. Some succeed and some don’t. While I don’t have the foresight to tell in advance which businesses will flourish and which will fail, I have observed that those who took the time to work though the following questions tended to keep their relationships, regardless of the business outcome.
Investing money in a business that’s owned by a family member or friend can carry a high degree of risk, both financially and emotionally. In part, this is because our judgement can be clouded, and it can be uncomfortable to ask questions about money and finance. When we are dealing with people close to us, we don’t want to seem to be cold, callous and driven by money. We might be concerned that by raising financial issues too early or too often, it could damage the relationship. Yet the relationship is far more likely to suffer if we don’t ask those questions and the venture fails.
Here is my checklist of things to consider before you mix business with family/friends.
- If you were investing with strangers, would you invest without seeing a business plan? I hope not. So no matter how good the idea seems (especially after a few beers with old classmates), don’t put your hard earned money into a business without seeing a business plan.
- Are there any other investors who are not emotionally connected? This will give you an idea of the value of the business from relatively independent third parties. Plus, other lenders or potential investors who aren’t connected will likely ask questions that you have overlooked.
- Do your own research and get advice from an accountant or financial adviser. Even if the idea is great, your professional advisers can help you confirm if it is in line with your values and goals.
- Ask yourself if you are a passive investor or an active shareholder? There is a massive difference. If you invest in BHP, you don’t actually have to dig up gold or sell steel. But if you are expected to be actively involved in the growth and success of the business, this is vastly different. Check that all parties to the business are clear on their level of active involvement.
- Does it support your own goals? Do you know anything about this field or have any interest in it? I have seen many instances of people investing with friends and family because they felt they “should”. Yet had those same investment proposals come from unrelated third parties, they would almost certainly have declined the offer to invest.
- Is there another way you can support the business without putting money in? Perhaps there are other sources of funding and you could be more effective as a consultant.
- Communicate clearly and often. Be perfectly clear that protecting your relationship is more important than a business venture. If you decide not to get involved, be direct about it. Saying “no” right away can often be more respectful than sitting on the fence for months for fear of hurting someone’s feelings.
Remember, too, that if your wish is to support and encourage friends/family, helping them jump into an unacceptably risky investment isn’t exactly doing them a favour.
If you make your way through the list and all areas stack up, then you could be in for a fantastic experience.
I wish you all the best.
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Disclaimer: This post has been prepared for general information purposes only. It is not specific advice to any particular person. You should consult an authorised Align Financial adviser before making financial decisions. Align Financial | Financial Planner Northern Beaches | Servicing North Narrabeen, Narrabeen, Mona Vale, Elanora Heights, Newport, Avalon, Palm Beach | Enquire with us online.
