"I want to open a business
with my friends"

Business With Friends

GREAT! And — How you structure it is of vital importance — both to the business and to your friendships. If you want both to prosper it’s critical to think forward— how could things go wrong even if they go right?

A critical component of any partnership or LLC is an operating agreement. Forego this and you may save some bucks early on and suffer down the road. Sure you know and trust each other — but if things go south, who takes the hit? Or if things go great and one of you wants to get goin? Or she dies — what happens to her investment? Horror stories abound. The following is a fictional situation — but one that is replayed time and time again — just change the names, numbers and details.

Stu and Mel open a painting business together — “S & M ReModeling”. Neighbors and friends, Mel has the dough and Stu the know-how. Mel pitches in 50 grand, Stu hires the crew and provides some equipment. Business is slow to start, but has potential. Stu draws a modest salary. After two years their account stands at $15,000 when Mel becomes engaged and wants to move to Israel — and needs to cash out his investment. Nothing is in writing, and Stu needs the funds to continue.

Mel thinks he is automatically entitled to his investment back — he wants $5,000 cash and the rest paid over two years, with interest. Stu protests that this will bankrupt his business and cancel his livelihood. Mel says Stu is living off his investment. Stu says the equipment he contributed should count too — it’s not worth nearly as much as when they started.They were the best of friends.

What are their options? Is there a way to keep them both happy, keep the business solvent and satisfy Mel’s concerns? There well might be — but with no prior agreement they have no legal framework to even start a discussion. It can be worse than divorce, where — as ugly as it gets — there are some established government guidelines for issues such as child support and alimony.

What should Stu and Mel have included in their agreement? At the very least these items needed to be addressed.

  • How will the start-up funds — Mel’s $50,000 — be treated? Is it a permanent investment — “capital” — or a loan? They may have different expectations. If it is loan, does it need to repaid by a certain date?
  • What is the value of any “non-cash contributions” — e.g. the equipment Stu contributed to “S and M”
  • How are profits distributed — what’s the formula— who gave the most? 50-50? How is Stu’s time included in that equation?
  • How does a partner exit?

Depending on the nature of the business there are many more such issues to be included. As with all relationships, the clearer the communication is the greater possibility of success. A business enterprise is no different.

©2011 Rich Streitfeld

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