Starting a new venture with relatives or close friends is a great idea, but make sure that the nitty-gritty elements of business are given their due importance
How often have you heard, “Do not lend money to a friend”? There have probably been times when you feel that you should never have entered into a business transaction with a friend or a member of your family. If your thoughts on this are negative, then you could miss out on major exciting opportunities. There are different hurdles to cross when dealing with a friend or a sibling than if you were dealing with a stranger. Often, one thinks about the potential ‘cons’ and walks away from a good prospect. Rather, one should concentrate on the ‘pros’ and find ways to make good decisions after a clear-headed negotiation session.
Business transactions between friends or family members can certainly be fraught. Close ties are generally founded on the expectation that we will look out for each other’s welfare and not “keep score”. In business relationships, by contrast, we expect to be compensated according to the time, effort, and money we expend. Negotiators are likely to experience a clash between these two sets of norms when doing business with loved ones.
I have spoken with, and heard from students of Executive Business Management classes on entrepreneurship who have agreed to set up a joint venture with a friendly classmate. The typical response to my question ‘Why did you decide to get together?’ is often naïve. Answers include comments like ‘we like each other’, or ‘we have similar thoughts and ideas’, or ‘we have similar strengths’. When I ask them about the split of the joint venture, their answer generally is ‘we agreed on a 50/50 split of equity.’ If you have heard such answers, you must also have heard that many such joint ventures are not successful. The simple reason is that the classmates don’t think through their options clearly and have not done their critical homework on their BATNA.
Several thoughts mentioned above are interlinked and not all of them lead to good or bad negotiations. A major drawback in setting up a venture with someone because ‘we like each other’ is obvious. You are more likely to compromise than to work towards getting the best deal for yourself. A compromise deal leads to sharing a known pie, rather than looking to expand the pie, so that each one gets a larger share and, therefore, a better deal. Think seriously about setting up a venture with someone who does not have ‘similar thoughts and ideas’. The reason is that neither of you can then become that valuable ‘devil’s advocate’. You are unlikely to think through options with a critical lens and may, therefore, miss opportunities, or even miss pitfalls staring you in the eyes. ‘We have similar strengths’ is a venture bound for failure. Have you ever seen a good cricket team that has only had the country’s best batsmen, but no bowlers, or a wicketkeeper!
It is quite possible that a 50/50 joint venture is totally workable. I would recommend that each one of the partners critically think through what they bring to the venture. It could be money, an incredible idea, sweat equity, strength in marketing, manufacturing, PR, or the ability to raise new funds. Each area of expertise may be given different weightage, and equity in the venture can then be divided in that proportion. My advice to entrepreneurs setting up a new joint venture with friends or members of their family is: ‘Treat the others as potential enemies, not as friends, as you carefully document each clause of the joint venture agreement.’ A blog written on June 18, 2018 by the staff of Harvard Business School said in its advice: ‘To improve the objective quality of your deal when you negotiate with friends, agree in advance that you will rely on the fair market value of an item or service rather than trying to grant each other special favours. Discuss the pitfalls of negotiating together up front. Finally, accept that you might get a better deal by negotiating with a stranger instead.’
Another issue that may crop up when negotiating with relatives and friends is that you may provide favourable treatment to them. There are two ways this may happen. You may give away something that should be rightfully yours as a concession to a relative or a colleague. Close ties are founded on the expectation that one is ‘forgiving’ and, hence, more likely to look after the other’s welfare. The second potential issue can arise by giving preferential treatment to a friend. This may lead to an unhappy or negative outcome for those directly competing with your friend. Take a case of a member of your family or a friend getting preferential treatment at the company where you are the boss; this could lead to qualified people without connections losing out. This would be both unethical as well as a bad negotiating practice.
A major element that gets left out when documents are set up for a joint venture with a sibling, son, spouse, or a close friend is what happens when one wants to opt out. There are many reasons for opting out: family divorce, a change of interest, possibly the need to cash out in order to use that money for children’s education, health issues, and the like. If the mechanics of valuation have not been clearly thought through when the venture is initially set up, there could be unhappy break up of friendships, or a situation in which siblings and their families never speak with each other again – a truly sad outcome. When starting a business relationship with someone close to you, Harvard Law School professors Frank E A Sander and Robert C Bordone advise you to take the time to discuss the norms, standards, and processes you will use to settle any disputes, or any significant changes to the business that may arise. It can be difficult to raise the possibility of conflict when an exciting new venture is getting off the ground. However, doing so will greatly improve your odds of maintaining a strong personal relationship in the event that you scale back your business dealings.
Starting a new venture, and working with relatives and close friends is truly a great idea, but make sure that the nitty-gritty elements of future potential conflicts are given their due importance. Give serious thought when negotiating with a friend or a relative. All of you at the negotiating table should strive for the best possible outcome
