Doing Business With Family and Friends

November 10, 2014 - Posted by: admin - In category:

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Working with family members or friends can present unique challenges and considerations.

A client recently asked me some questions regarding an existing family business relationship, including whether a written contract was needed.  In addition, earlier this week, I spent much of my day advising a different client with regard to some family business matters.  Although every situation is unique, there are often common considerations that come into play in the context of family members (or friends) doing business together.  Let’s look at a few important ideas:

First, you will not be surprised to learn that many people who are “doing business” with a family member or friend have an “agreement” in place, but they do not have anything in writing. This may seem logical on one hand—because if you are working with your parent or child or best friend, that is a situation of trust at the outset and the last thing on your mind is a concern that such family member or friend will do something that is not consistent with your expectations and trust. However, there are many reasons to put things in writing, not the least of which is the need to ensure that you, your family member and everyone else is clear about the terms of your agreement.

Have you ever had a conversation with another person, discussed several options and then come to a mutual understanding—only to find out later that what YOU thought had been agreed was VERY different from what the other person understood to be the agreement? The reality is that every person hears, interprets and understands differently and the BEST way to CLARIFY terms of an agreement and then to PRESERVE such a mutual understanding is to reduce the same to writing (whether that “writing” is on paper or on a computer screen).

This preservation point is also very important because your memory is likely not perfect (neither is mine) and what you are thinking and remembering today is likely to change over the course of the next five years and the same thing will almost certainly happen with your family member or friend. Thus, even if you and the other person are “very clear” on what you have agreed today, this clarity is going to fade over time. While people’s memories can fade, written documents will not fade and will instead preserve terms of understanding over time. (Imagine if our Founding Fathers had not written the Constitution but had instead just had a “verbal understanding”.)

Having a written agreement may also help with regard to tax matters, getting a loan from a bank and any other number of dealings and interactions between you, your family member and/or friend and a third party. Another thing to consider in this context is what will happen as your business grows and time passes.

  • Do you anticipate there will be new people or organizations that will take a part of ownership or management of your business enterprise?
  • What will happen if you decide that you no longer wish to engage in the business a few years down the road (or your family member or friend makes this determination)?
  • How will you go about selling and exiting the business?
  • What if your friend decides that he’s done working on the business next year and sells his portion of the business to a Chinese company?

The list of “what ifs” could go on and on and on and on…

While it is impossible to predict what the future will bring, it is possible to plan for many potential occurrence and establish a procedure and framework to handle these things as they arise.  In just about any business enterprise, there will be the need to account for:

  • profits and losses;
  • ownership structure;
  • changes of ownership;
  • management decisions (now and later);
  • whether an owner is permitted to sell his or her interest and if so, an agreed procedure that will be followed;
  • contingencies for disability, death; and
  • many other “life issues”.

You, your family, your friend (your future employees and business partners) and everyone else who has a relationship or will at some point have dealings with your business enterprise is best protected by you having written agreements in place.  Does that mean you MUST hire an attorney to write these agreements?

No, you are free to write your own agreements and if you are going to choose between writing your own agreements and doing nothing at all—by all means, PLEASE, write your own agreements.  In most cases, having ANY sort of written understanding is better than having nothing in writing. So the first step is simply to write your own agreement that clearly sets forth the terms of your business and provides for as many potential contingencies as you can think of and how such things will be addressed. Again, that is a wonderful first step.

Of course, you will not be surprised that an attorney tells you that you would be wise to at least consult with an attorney with regard to your business, your agreement and whether it makes sense to retain an attorney to help refine, improve and “legalize” your business relationship. Among other things, the attorney should be able to give you wise legal counsel and perspective that could greatly improve (and, believe it or not, simplify) your current business management and operations and could also protect against and prevent many potential problems in the future. In short, a good attorney should be able to SAVE you far more money and trouble than what he/she would cost on the front end. Just as with medicine and dentistry—preventative actions taken in business and legal matters are almost always MUCH less expensive, much easier and much less painful than fixing problems, fixing “self-help” blunders down the road.

But again, the first place to start is to sit down with a pen/paper (or computer) and put something in writing.

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