Friend Wants To Buy Into My Business. Any Advice?

[JohnnyFrancis]

Hi Everyone,

Just looking for some advice.

I currently have a small business that I've been involved in for close to 5 years. It's a contracting business doing general labour, currently all residential.

Now I currently have only 1 management company that gives me about 20k/year in total invoiceable jobs, so I probably make about half, to two-thrids of profit out of that amount from them. The rest of my business comes from my website where I do odd jobs for residential customers. I probably make another 20-30k in profit on those jobs. My yearly profit probably works out anywhere between 30-40K in profit by estimation, however a lot of that is cash so I have not kept complete track of it all. Could be less than my estimate or more, it varies.

Now the thing is, my business has been fairly slow as of late, and with the lack of any kind of financing behind me, it's been hard to get ahead.

I have a very good friend who is considering becoming a potential partner willing to invest in the business. My vehicle is shot, so he is willing to purchase a work truck as his investment. He is willing to invest his time by working with me daily, and we would be looking to revamp the business, in essence it would be like almost building a new business because we would be canvassing to get many more management companies to give us work, as well as offer more services than we do now, and potentially move into the commercial end of our business doing work for apartment buildings and warehouses.

Our main goal is to get busy enough in order to get to a point where we will be able to hire guys to do the labour, and we can continue on with the sales and business building end of it.

Now aside from offering to purchase a truck, and work full time with me. For the beginning of the venture, he does not want to be compensated financially until things pick up, as he knows the financial situation I'm in, and does not want to take away from my current income earning as I am in pretty rough financial shape. Furthermore, he said that he will invest further into the business either by giving me a figure that I think is fair ($5000, or possibly a used car that I can use for my family's transportation). He also said that if things don't look to be working out in the first 2 or 3 months he will pull out and we can work out a payment plan to pay him back the money that he invested (be it for the truck, car or any money he invests). Or if he stays with it for say a year and decides he does not want to do it anymore and leaves, I will not owe him anything.

This is something that I think would really help our business as I would additional support behind me with the sales/labour aspect of it, as well as that extra drive and motivation that may really help our business take off, rather than just living week to week.

I would love to hear any advice, suggestions or opinions on what you think would be fair for both parties.

Thank you!

[pete]

Do you want to lose a friend?

You might either way. Usually friends or family in business is not good.

[Dale King]

Working with friends and/or family can sometimes be like oil and water. It's generally not a good mix. What really concerns me more than anything is the amount of investment your friend is willing to make in your business without expectation of any immediate return. You know the old saying, "if it sounds too good to be true..." And on the surface this sounds too good to be true.

That being said, partnerships between friends can and has worked for many businesses. Just be sure to get EVERYTHING in writing, and get the contract checked out by an attorney you trust. For added protection, hedge your bet with a six month escape clause. Then closely monitor the situation for a few months and if you see things aren't working walk away.

But again, to me this sounds too good to be true. So, watch your back!

Dale King

[Tom Young]

Originally Posted by pete

Do you want to lose a friend?

You might either way. Usually friends or family in business is not good.

Not to say that it will not work, but the law of averages says that the cards will be stacked against you.

One of the hardest lessons that I have learned since starting my business in 1975 is that it is an absolute must to create and maintain a separation between business and pleasure and/or friendships.

FEW EXCEPTIONS!

Expect the price for not heading this advice to be costly.

Tom

[DeenaEsq]

Johnny,

I agree with the above posters that business ventures with friends are often hairy and end in the ruination of the friendship. That being said, very often family and friends are the first place that any venture capital group will tell you to go when you are looking for funding... I'm assuming you know the risk and want to do it anyway, so I'm going to go ahead with my advice...

Please, please, please get your agreement in writing. You're friends now, but that may not always be the case and you need to protect yourself, your family and your business.

That being said, you need to decide the % of your business (I'm assuming that you're organized as a sole proprietorship, which is not the subject of this post, but certainly wouldn't be my suggestion for the organization of your company, but I digress...) that you will be "selling" to him for a specific sum. Not, "he'll buy me a truck and give me some cash". He will give you x dollars toward the purchase of a company vehicle and x dollars for investment in the company plus daily work for your company without pay until some event (which you need to specify) for an x% ownership share in the business. Basically, you are selling him a part of your business. You need to treat it that way.

As an aside, if he wants to buy you a used car for your family as a friend, that's great. Make a loan document with him and pay him back. It gets sticky if you mix your business and personal assets.

Your other option is to make it all a loan. Spell out the terms of the loan including the part where he forgives the loan if he is still working for the company in one year.

It's certainly up to you how you structure it, but make sure you do it carefully, like a real business deal and don't act like friends. Act like you're going into a business deal with someone you don't know.

Hope that helps.

Let me know if you have more questions.

Deena Burgess
__________________________________________________ _______________

Any opinions are offered without knowledge of the specific law of your jurisdiction and with only the limited information provided in your post. No advice given here should be reasonably relied upon by you or any third party without consulting an attorney who is aware of all of the facts and law surrounding your situation. Any advice given here is not intended to creat an attorney-client relationship in any way.

[Ghulam Nabi]

Partnership is successful when there is,
Transparency,Honesty ,Job description, and accounting.
Go ahead,

[jared_gibbs]

I like DeenEsq's idea of selling him a loan instead of equity. It would probably be the least messy as far as mingling assets is concerned. Writing an agreement for this would be easier than a partnership agreement. You should try to make it worth his while to loan you money. Offering interest and demonstrating a likelihood of repayment are excellent ways of doing so. Get your salesman cap on, and put yourself in his shoes. If you were him, would you loan you money?

If you're going to do this as a partnership, I would strongly recommend hiring an accountant and a lawyer. The thought of incurring another expense at this time probably doesn't sound like the best of ideas to you right now, but an accountant and lawyer will be well worth your time and money. An accountant will help you keep all of your business records in order. You both will want to know what assets are the business's, and how they are divided between your equity, your partner's equity, and liabilities. This way a written, accurate record is always kept by a qualified individual. Especially where times are hard right now, I guarantee that if you do this as a partnership without an accountant you will run into problems. Please get an accountant.

Either way you go, I would plan an exit strategy on his part. A loan is easier simply because he will exit when it is paid in full. If he is to become a partner, an exit strategy will guide both of you through his entrance, role in the business, and exit of the business. It will allow him to come in and help out and then smoothly transition to normalcy when the time comes.

Hope this helps, and good luck!

[Richard777]

Working with friends can be a tricky situation.

I'm not sure I would go that route. But if you do then put everything in writing. For when you are working, your friends are your business partner not your friends and the partnership must be treated in such a manner.

Put everything in writing!

[jakelake]

All good suggestions from above posters.

If you need a partner/investor, try to find an outsider. However, if you still want to partner with your friend, form LLC or LP and use good business lawyer to draft Buy-Sell Agreement. Don't forget to specify in details responsibilities of each party.

Good luck.
Jake