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So your friend has come to you with some great news, she’s starting her own business! Over coffee she shares her vision and her goals, her passion and her plan. It all sounds amazing, until she pops the question, “Can you help me get started?” As her best friend, you want to be there for her and support her, but is investing in her new business something you’re really ready to do? Mixing business with social life is tricky, but it’s doable. Like the business she’s starting, you must have a plan and stick to it if you want her business to be successful and your friendship to remain intact.
#1) Do Your Research
Most small business investment opportunities come from family or friends, and it usually means they need help financially. They know they can turn to “their” people because it’s hard to say no to family. So if you’re ever put into a situation like this, you need to be prepared. You need to dive deeper than the pitch they sold you. Find out why they need help in the first place; why they couldn’t get the money they need from the bank. It’s not always a bad thing that they couldn’t. The bank is just more hesitant now to lend money to small businesses, which is most likely why your friend is turning to you for help. But knowing this can set a solid foundation for the investment ahead.
#2) Start a Paper Trail
Once you start getting down to the nitty-gritty of the business plans, you need to make sure everything is in writing. Although it may not seem important at the time because you guys are friends, it will down the road. So you and your friend need to sit down and clarify what role you will be playing in the investment. You also need to clarify the structure of the business. This could seriously affect you in the long run. If for some reason the business fails, you could be left personally responsible if they don’t choose the best structure for their business. Once everything is in writing then there are no if’s, and’s or but’s about what was decided upon from the beginning and gives you both a clearer understanding of the agreement.
#3) Know When to Walk Away
The best way to protect yourself and your relationship as friends is to establish an exit strategy. You need to have a plan in place if something were to go wrong. You also need to discuss a plan for how to sell your stake in the business once you start seeing a return on your initial investment. There’s never a guarantee, especially when dealing with a small business, when that pay out may be, but if you establish an arrangement or guidelines, it will make things easier in the end.
#4) Get Some Help
Professional advice is never a bad idea. Your friend may seem like they know what they’re doing, but it doesn’t hurt to find someone just to ensure everything is being done correctly. It may cost a bit extra, but it will be worth it if something bad were to happen.
#5) Friendship First
You always need to remember why you’re in this situation in the first place. You may have been approached for your financial help, but in reality, your friend is seeking your guidance and support, as well. If you believe in your friend’s new business then let them know. Show them by sticking with them, even when the going gets tough, because believe me it will. But at the end of the day, you’re still friends. So don’t bring up business talk over drinks after work. Maintaining the same friendship you had before you started mixing the two will keep you both from going crazy.
Investing in a friend’s business poses a number of different risks, including ruining your relationship. So it’s important to decide if this investment is worth losing a friend over. Your decision should be based off more than just helping out a friend, because when money is involved, it can get messy. If you think your friendship is strong enough to see this business through, then go for it! It’s only money and at the end of the day if you both are making more than when you started, then it was all worth it in the end!
Have you ever invested in a friend’s new business? How did affect your relationship? Did it make you stronger? Or push each other away? Let us know below and don’t forget to share this with your friends and family.