Should You Go Into Business With a Friend?

The Case of Nimble ActiveWear

Today I read a great story on the Smart Company website about the two women behind the multi-million dollar clothing brand, Nimble ActiveWear. Katia Santilli and Vera Yan have been friends since they were 14. They met at school, but when they grew up Vera moved to Sydney while Katia went to London. In 2013 Vera went to stay with Katia in Sydney and they started going to the gym together. Both women felt there should be more gym wear on the market that was functional and fashionable, so they started a company on ‘the side’ while working. Today Nimble ActiveWear turns over $3 million in sales and these women have just opened their first shop in Bondi. Congratulations Karia and Vera! But not all business ventures started by friends are so successful and failed business ventures have ended friendships. Do you think it’s a good idea to mix business and friendship?

Why friends start businesses together

I am prepared to mingle business and pleasure however I believe that friends need ground rules before going into business together. Maybe you are thinking of starting a life-coaching business with your best friend. After all you two have supported each other through thick and thin. You know you make a formidable team. That’s the reason why a lot of friends go into business together. There is already a basis of trust, understanding and respect. People believe that this foundation will help the businesses if you ever run into tough times. Sadly the opposite is often true.

Facing challenges together

People have very different attitudes towards money, and your long-time friend might respond to a financial challenge in a way you never have anticipated. They might become emotional, irrational even aggressive when faced with a financial difficulty. They might yell and scream at you, insult you and use deeply personal information against you. Would you still want to be friends if you were treated like this?

Also friends usually haven’t had a lot of practice facing a crisis together. Normally you share problems with a friend, and they workshop solutions for you. In business you have to weather the story together. In some situations people are prepared to lose money and let the business suffer, rather than have a tough conversation with a friend.

Set Boundaries

Again my advice to you is set boundaries – have rules for how you are going to deal with the worst-possible scenarios. Put all of this in writing. Is there a neutral place where you can have difficult conversations? Don’t conduct those in your house or your friend’s house. These are places where you enjoy the friendship. If you are a non-confrontational type of person, be prepared to have awkward and uncomfortable conversations with your friend, because business requires that. However if you have drawn up boundaries from the onset you should be able to preserve the friendship.

Schedule Business Conversations

Schedule regular times to talk business with your friend and partner. That might seem crazy because as friends you chat every day, perhaps a few times a day. But business talks are a different kind of talk. Ideally you should have weekly business meetings and a formal agenda, which includes tackling problems. In this meeting, you need to pretend you are dealing with a stranger. Put that in your founding agreement. You need to speak to your friend and partner in a strictly professional manner while in that meeting.

Know your friend

Another helpful hint to protect the friendship is: ensure you know your friend’s strengths and weaknesses, and their professional history. Sometimes friends exaggerate about their achievements, but it is no good starting a business believing your friend is a web-design master when they don’t even know how to turn on a computer! Also be sure you have the same motives and commitment. The business is not going to work if one of you is very serious about success and the other is going into it because it might be fun and social. In a short time you will be fighting. The person working hard will become frustrated with the relaxed attitude of the friend. Ideally you should have stated in writing how many hours you both will be putting into the enterprise and what your motives are. You also need a clause covering how business funds are to be spent. Your friend might like splashing cash around. He or she might think that their lunches should be covered by the company. They might want to buy only the best equipment for the office, when you are happy to make do with second-hand furniture. Again, you need to have ground rules.

The One-year Cliff

You also need to define what will happen if someone wants out of the business. Most co-owners start out promising to split everything 50-50. That’s a mistake. Put in a provision known as the one-year cliff. This means that if either of you leave in the first year, they walk away with nothing. If you have invested your time, energy and money into getting a business up and running, it’s a disaster for a partner to pull out 50 percent of resources within 12 months. This will cripple the company. Instead draw up a contract that only entitles each of you to a 50 percent share after four years in business together. You earn 16% on the second anniversary and 17% at the end of the third and fourth year.

The Story of Aldi

Have you ever read about the two brothers who started the German grocery chain, Aldi? Theo and Karl Albrecht inherited their mother’s grocery store in 1946. Today Aldi has an annual turnover of $77 billion. But in 1960 the two brothers had a huge fight because Theo wanted to sell cigarettes in their supermarkets, but Karl was against it. So bitter was the feud that the empire was split in half. Theo took Aldi Nord, which operates in Belgium, the Netherlands, Luxembourg, France, Poland, Spain, Denmark, and Portugal. Karl got Aldi Süd, which operates in the United States Austria and Slovenia, Great Britain, Ireland, Australia, and Switzerland. The two companies even have different logos and sell different foods. If you ever visit Europe check-out the two stores.

Theo and Karl Albrecht made billions but they lost a person they loved and trusted. Before you start up a company or ‘side’ business with a friend think seriously about what you are getting into. What price do you put on a relationship?