Working / Setting up a Business with Friends & Loved Ones

December 15, 2015

 

The problems lie not in the “friends / loved ones” bit at the end – but rather in the “working/ setting up a business” at the beginning.

The first reason FF (FF = friends, family, loved ones, neighbours etc) give for going into

business with each other is that they trust them i.e. trust them with money, trust them to

turn up, trust them to make good judgments, trust them to be consistent. However this

trust thing is quite “emotional” and really what we mean is that we expect the FF to be

accountable, act responsibly and share similar priorities and approaches to things.

There is nothing fundamentally better or worse about going into business with FF compared

with anyone else. Businesses can fail for a multitude of reasons but (aside from

unforeseeable external forces) the reasons generally fall into two categories, poor planning

or poor implementation. This applies to all businesses alike.

The problem for start up businesses (and perhaps all businesses – and perhaps all of

society!) is mis-matched expectations i.e. what we want and expect from others or as Bob

Dylan sang “do unto others and let other do for you”.

Now it doesn’t take a lawyer to draft a set of rules to set out those expectations so it strikes

this lawyer as very odd that most FF’s setting up businesses fail to write down exactly what

they expect each FF to bring to the party – and, just to continue the party analogy:

– how much money does each FF contribute (FUNDING)

– do all FF’s get to party or are some required to serve food, play music, take out the

rubbish, provide door security etc (CONTRIBUTION AND EMPLOYMENT)

– what leftovers does each FF get to take home (PROFITS AND DIVIDEND POLICY)

– who chooses the theme – or changes it if it doesn’t work (RESERVED MATTERS

REQUIRING CONSENT OF SHAREHOLDERS/DIRECTORS)

– what if FF get bored and go to the party next door taking guests with them (NON-

COMPETE, ANTI-POACHING ETC RESTRICTIVE COVENANTS)

– what time does the party end and who decides (TERMINATION)

– what happens if the police break it up early or Beyonce wants to buy the party or the

house for millions (EXIT)

The problem with FF start-ups is that these trickier questions are often answered by saying

“I trust my FF” or “My FF and I will work it out as we go”. By comparison start ups with

strangers or business acquaintances are more likely to try to answer these tough questions

at the outset.

The size of the problem is illustrated by Joint Ventures between established companies

where typically two companies agree (either contractually or by owning part of a special

purpose company) to work together on a business venture. The average expected length of

a corporate JV is 7 years but in reality they tend to last for only 3 years on average.

Similarly, I would say from my experience that a large majority of FF companies or

partnerships that get into trouble early on and seek out professional help do not have a

shareholders agreement and/or a bespoke set of articles of association (i.e. company rules)

or a partnership agreement. Generally the parties explain that it all started on a trust basis

but circumstances changed thus putting pressures on the original understandings between

the parties.

Optimism is a wonderful and essential component but so is good communication and

planning. Shareholders and partnership agreements are useful for two reasons (1) as an

opportunity to flag up and discuss challenges and “what-if’s”, make a map and choose a

route at the beginning, and (2) a cleaner way of dealing with problems and (to continue

another analogy!) fixing the car or scrapping it down the road. A good healthy argument in

the early stages is sometimes a very good thing.

Now shareholder agreements don’t anticipate or solve all conceivable problems but suffice

to say they are a good starting point and, as to what goes into a good shareholder

agreement, well, that is a discussion for another day…

Andrew Smith – LawBite LawBrief. For further legal advice you can contact Andrew via our online legal advice portal.

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