Solid legal arrangements serve as the bedrock upon which successful and lasting friendships turned business alliances are built. The Jamaican proverb, “Good friend better than pocket money” is often declared with confidence and so too is Ziad K. Abdelnour’s saying that, “a truly rich man is one whose children run into his arms even when his hands are empty”. The two statements have led to the following inquiries: Can one honestly say one would make those statements without anger, disappointment, and even distrust, following the failure of a business enterprise with a friend or a family member? A failed business venture can cause the loss of more than your pocket money. The question stands, how then does one effectively mix business with familial ties and friendships?
Launching a business venture with family and friends can be an exciting prospect. The possibility of combining shared passions and camaraderie, with the potential for financial rewards, to build a legacy is energizing fuel. However, as appealing as it may seem, to embark on a business journey with ‘blood’ and a good set of friends is daunting. Therefore, it is essential to enter it with eyes wide open. It is important for formal legal arrangements to be the unseen partner and advisor: providing answers to the hard questions, building the perimeters to operate the business, and of course setting expectations.
If you have entered a business venture with a friend or relative or are thinking of embarking on such a joint venture, this article highlights a few things you may wish to consider.
A solid written agreement provides clarity and understanding among friends turned business partners. With the help of a good commercial attorney, the agreement should delineate everyone’s roles, responsibilities, and contributions to the business, leaving little room for ambiguity. Such clarity helps mitigate potential misunderstandings and disagreements that can arise while running the business. By explicitly defining the expectations of each business partner and setting out provisions for decision-making processes, profit-sharing, and division of labour, one ensures that every partner knows what is expected of them, and what each partner expects from the business venture.
The written agreement may take various forms such as a partnership agreement, joint venture agreement, shareholders agreement, etc. One should therefore recognize the need to consult with a good commercial attorney to determine how to structure, or restructure, the business venture and which agreement or set of agreements is most suitable for the preferred structure.
Protecting More Than Pocket Money & Reputation
When family and friends join forces in business, they are investing their time, energy, money, and other resources into the shared vision. Therefore, one should ensure that the written agreement protects the interests of each partner by outlining ownership percentages, capital contributions, and property rights, among others. While a friend or relative may claim to be feeling disadvantaged or unfairly treated in the business, he/she is likely to have a more difficult task if his/her feelings are not supported by the expectations and understandings set out in the written agreement. If, however, the feelings are supported by the written document, he/she will stand on solid ground to demand redress.
Clarity Regarding Exits and Contingencies
As much as friends and relatives hope for their business partnership to flourish, it is vital to consider the possibility of an eventual parting of ways. Legal arrangements should contemplate exit strategies and contingency plans, providing a roadmap for how to dissolve the business amicably if circumstances change.
A good commercial attorney should be able to assist one to ensure that the written agreement outlines the process through which a business partner can sell his or her share/interest in the business, retire, or withdraw due to personal or other reasons, the process through which the business handles the death of a partner and succession planning. By having a well-defined exit strategy in place, friends and relatives should be able to mitigate the emotional strain that comes with ending a business partnership and preserve their cherished relationships – hopefully.
Although the adage “friends, family and business don’t mix” rings true in some cases, with the proper legal guidance and a winning business strategy it can be successful. By clarifying roles and addressing potential risks, written agreements help to foster an environment of trust, certainty, and mutual respect in the business. They equip friends and relatives turned business partners with the tools to make informed decisions, resolve conflicts, and navigate the ever-changing business landscape successfully so that business partners can preserve and maintain their pre-existing relationships.
Jezeel Martin is an Associate at Myers, Fletcher and Gordon, and is a member of the firm’s Commercial Department. He may be contacted at email@example.com or through the firm’s website www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.