Friends Don’t Let Friends Go Into Business Together

Good grief, I’m an attorney, I should have known better.” Paul (not his real name) is a successful mid-40s year old lawyer with one of Knoxville’s preeminent law firms. Based on what I’m about to tell you, your first instinct will be to agree with Paul, he should have known better.

Thirty years of handling business transactions have taught me a lot about human behavior. There are some mistakes I see over and over, so when Paul asked me to mediate a conflict with his business partner, I quickly surmised that history had repeated itself, again.

Paul and his wife were good friends with Kevin (not his real name) and his wife.  For over a decade, the two couples hung out at the same country club, attended parent meetings at the same private schools their kids attended, and even vacationed together two or three times. They seemed like kindred spirits.

Kevin came from a wealthy family but had never established a professional direction. He dabbled in real estate and worked in sales for two pharmaceutical companies. He loved to talk about his latest stock pick, he considered himself a bit of a financial guru. Kevin’s uncle invited him into the family business to run the southeastern sales division, but that didn’t last more than a year. Kevin said he and his uncle didn’t see eye to eye. Suffice it to say, Kevin couldn’t stay settled long.

While on vacation together in the California wine country, Kevin told Paul about his idea to open an upscale coffee shop using exclusive beans from Kenya.  A coffee devotee himself, Paul loved the idea. Before long, he and Kevin were developing a business plan to open a retail location, with a plan to ultimately get into the wholesale business. Kevin would do most of the work to set up and operate the business for 75% ownership, and Paul would provide the financial investment for 25%.

The store had not been open more than a few weeks before Paul began to feel distance from Kevin. “I’d call and ask for sales updates,” Paul said, “but Kevin would tell me his accountant hadn’t finished the books. Days became weeks.” Meanwhile, Kevin felt like Paul was meddling. “Paul would call and ask about trivial matters not germane to the success of the business,” Kevin told me, “Paul means well, but he’s a lawyer, he doesn’t even know what questions to ask, so I guess I sort of began to ignore him.

The Paul and Kevin story does not have a happy ending yet. Some disputes and relationships can’t be resolved through reason, especially when they involve people who at one time had a close personal relationship. Even the best legal documents are not helpful because broken relationships are seldom settled “by the book.” Moreover, there is always collateral damage, such as Paul having to move his kids to another private school since seeing Kevin and his wife so often was too awkward.

Paul can’t leave his law practice to buy out Kevin, and Kevin doesn’t have the financial capacity to buy out Paul. They are basically stuck with each other for awhile. The best case will be for the business to be a success and fund Kevin’s ability to buy out Paul. That’s what both parties are hoping anyway, though it’s not likely to happen anytime soon.

Did history repeat itself? Indeed, it did in this case. Before going into business, the friends should have developed a framework for exit in the event of an intractable dispute. The tried-and-true “mutual buy-sell clause” seems logical, but as in this case, it usually isn’t a practical solution.

Seeing a business fail is painful, but seeing a personal relationship fail is even more painful. My thirty years observing this has led me to this conclusion: don’t go into business with a personal friend. I know that’s an extreme statement, but I’ve seen enough fallout to believe even the potential for gain does not outweigh the risk. Friends shouldn’t let friends be business partners.

 

JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The names and fact patterns above have been changed to preserve the parties’ identities.

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Tennessee Valley Group

Jim Cumbee established Tennessee Valley Group to help business owners fulfill their dreams for life after business ownership. It’s a mission that his 30+ year career history had prepared him well for—in addition to being an attorney, transition mediator and business broker, Jim has been a buyer, seller, and entrepreneur. His broad range of experience gives him unique insight into how business buyers and sellers can achieve their goals.

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