The Social Marginal

Investing in a friend’s small business while it is either just getting started, needs additional capital to expand further, or just investing your time in helping them grow the business with your experience can be a very stressful and trying test on a friendship.  The hardest part for both parties in such a situation is to really remember that ‘business and business’ and to have the discipline to keep it that way, which includes keeping your emotions in check.  However, if you feel that it would be beneficial to both parties and you can make it work, it can be a very financially invigorating experience. 

I’ve personally done this with a friend’s business by investing both a good deal of my time and a nominal amount of money (to provide services) to help him expand and move it to that ‘next level’.  We’ve been through a lot of disagreements and trials on the business side, but in the end, as of now at least, the business continues to grow and move in the path we wanted, we still respect each other’s expertise in our respective areas and understand that they balance each other out, and most importantly, we’re still friends (he’s actually going to be best man at my wedding).

Here are a couple things which we did that worked and carried us through an expansion experience with me coming into an existing company to assist:

1. Of course, with EVERYTHING, we drew out contracts and put it all in writing, this is a must and something that I just have to remind everyone of at every chance possible.  It keeps both parties honest and keeps the transaction completely professional.  At least it should.
2. When we first started the agreement, my expertise in certain areas were needed and he couldn’t afford to pay me reasonable rates for it.  It was going to require a great deal of my time, as it had already informally at that point, and a small amount of money (not to be paid directly to him, of course) to be able to expand to provide additional services to clients.  Since a salary couldn’t reasonably be established at that time, we agreed (completely mutually and without reserve on either side, which is important for this type of thing) that he would make me a 25% partner in the company in exchange for my assistance.  This was a fair amount given the value of the company at the time and is a percentage that must be weighed carefully based on the net worth of the business and what you’re bringing into it, but it is definitely a viable option to get things started, especially in a time investment for expansion.  At a later date, the original owner could always buy back those shares at a mutually agreed upon sum.  If you don’t understand what you’re doing or the liability risks with doing so, I suggest you seek a lawyer’s advice if you decide to go this route however.
3. When coming in, aside from offering technical services to his clients, it was also necessary for me to mentor him concerning running the business more efficiently.  This is where things can get sticky, and the only way that we could insure to it went smoothly was for him to basically agree (contractually), that for a six month period I would be his ’supervisor’ and he would be accountable to me for everything; from reviewing clients and how to deal with them, to hiring employees for jobs when needed and what jobs to actually take, everything had to be run by and approved by me.  This can be hard for a business owner but ultimately extremely beneficial if they lack business experience and you have a good deal of it; it worked well for us and the company is better off due to it, as is my friend with his improved business skills.
4. As the expansion began to come together finally and we started seeing returns from it, as we had previously discussed, a new contract was drafted and I was put on a nominal monthly salary.  This was more about keeping it professional and preventing feelings of not being compensated for your time and effort than strictly about the money.  As I said, it was a nominal amount and if it is possible, I highly suggest doing it from the beginning, even if gaining a share of the company for your assistance.

Generally a time will come when you’ll be presented with a choice about whether to stay on as a partner or to ’sell out’ and leave your friend’s business in a better situation (hopefully) than you came into it in.  I came to this point and after some discussion, we decided that, given how well we worked together, I would stay on as a partner and continue to help indefinitely and draw a salary for work as ‘Operations Manager’.  It’s not my day job, but it helps augment my other income and as a partner I have additional motivation that I’m not only helping to grow my own share of value in the company with the hard work and dedication that I put into it, but also my friend’s.

In the end, we found that it actually helped both of us have more respect for each other on a personal level and it actually enhanced our friendship.  It was because we handled it right for what we were doing and planned it out so that our differences would end up augmenting each other rather than clashing.  This, of course, won’t be true for everyone and I urge anyone considering going into an existing friend’s business to carefully consider it and find a path that is right for both of you so that you can retain that friendship in the end.

Business is Business.  Friendship is Friendship.  It’s as simple as that, and if you keep it that simple, then you’ll have a much greater chance at success in both areas.