The emotions and behaviours that commonly play out when family and friends are in business together, can be both good, and not good at all.

People with a strong desire to launch a business of their own commonly first turn for brainstorming, support or advice to their close friends, parents or relatives. They may seek a loan or angel investment. They may offer a stake in return.

What begins as joint testing of a hunch – a product idea, online shop, cafe, technology company, professional service firm or other type of business – may result in shared liability and burdens.

Exploring the risks and rewards of business with family and friends charts a path to minimise or avoid undue confidence, differences in values and disharmony.

Working with empathy or for egoists or psychopaths

The old adage to “never do business with family or friends” rings true for all who have been bitten, as I was once decades ago. Having learned from personal experience, and hundreds of matters for clients, I’m still prepared to do and support business with family and friends.

Friends and relatives can assume they have common or aligned values and reliable capability. They tag along in business due to familiarity and the rewards of mutual empathy. They are typically reticent in business to openly critique each other’s late discovered unhelpful habits, fixations or performance shortfalls.

family business legal documents

Setting out understandings and expectations in writing avoid and minimise turmoil and broken relationships in family business

Working with a sibling, cousin, nephew or friend can add the unhelpful pressure and delay of taking into account the views of their spouse, partner or in-laws. These outer circle people will be distant from the nitty gritty of what is making the business tick or fall apart.

All this bites for this reason. Family and friends are wrapped up in the psychology of wanting to preserve their collective backstory, to stay amicable, and to maintain valued long-standing bonds.

In contrast, people in business for just business, can more easily let go and admit that “This boogie is a mess, let’s change it or dump it.” As unattractive as it may be, this business-like behaviour is evident among the egoists and psychopaths who disproportionately populate the C-suite of businesses and leadership in society.

Inter-generational and familial business case study

On the other hand, family businesses have a lot going for them. In the lists of the wealthiest people in the world are members of families that have been financially successful for generations.

A little over a generation ago three dynasties in Australia tightly controlled vast swathes of Australian media and publishing. They were the Fairfax, Packer and Murdoch families. From as early as the 19th century each generation passed valued assets down to the next. Less visible and appreciated is the tutoring, business know-how and business war stories shared within these families and their circles of contacts. This was retained corporate memory helping to spot opportunity early and avoid repetition of mistakes made by prior generations.

Opportunity, ruptures and dissolution emerged from the late 1980s in the comparable but different story of each of those media families. A bookshelf appeared recording their collapses,[1] crisis, litigation, diversification; or international financial success in the case of the Murdoch family.

Business cloning is an internet search week away

In the 2020s change continues to escalate and is turbulent, adding complexity to investment and business decision making.

Today products, services and systems are more sophisticated and competition can be an internet search followed by a week of business cloning away. Confronted by more variables, remaining vital today is the necessity for improved predictive capacity for business decisions and good governance, informed by trusted, up-to-date and where necessary cross-disciplinary counsel.

Unless an educated guess or gamble are an acceptable way forward, no investment should be made or business progressed when there is little or no confidence in the idea or concept for the business.

For investing parents or other family members or friends fortunately in recent decades many tools and facilities have become available for assessing and strengthening business ideas. They should be used. Incubators and accelerators have added to the toolkit available from traditional advisory professions. To assist entrepreneurship, creativity, and business growth available more than ever before are software tools, books, free or paid newsletters, and free blogs, vlogs and podcasts.

Documentation and know-how minimise risk and deliver justice

Friends and relatives deciding to do business together have no reason to take shortcuts. In closely-held businesses, friends and family who choose to be silent partners, should ordinarily still require documentation.

An ageing population increases the challenge. People living longer have to look after each other longer and have the financial means to do so. Documentation is a type of future-proofing.

structuring family business contracts

Written documents minimize surprises and issues and chart paths for parents financing or otherwise involved with their children or grandchildren in business

Shared pitch decks, spreadsheets, employee agreements and organisation charts keep all on the same page if that is appropriate to the particular venture. Business monitoring, regular reporting and investor briefings can communicate both the good and the bad surprise

These records and documents provide useful references and a desirable level of certainty to check why things are working or not going as expected. Written contracts between those involved have the added benefit of being binding and enforceable under law and provide a pre-agreed definition of what constitute justice in the event of many eventualities.

To achieve that outcome lawyers, accountants, financial planners, programmers, management consultants and other subject matter specialists are positioned to provide independent, unemotional consultancy and advice. Consultancy involves thinking broadly, advice follows after it, and the two in combination are best before launching into any transaction or preparing a transaction document.

Downloading “bargain” generic templates and not engaging experienced professional hands to select and customise them as appropriate is false economy. The tell tale signs jump out in my experience when clients have insolvency issues, a dispute or a threatened court case. The vast majority of those sad cases arise largely because there is no, minimal, poor or overly complicated legal documentation.

For start-ups there’s no one size fits all for legal documentation. Best practices change rapidly for commercialisation of intellectual property and businesses. For that reason our firm maintains a suite of defined matter types and related workflows and documentation to help minimise risks for relatives, friends and others working in collaboration. Here’s a sample list for families and friends.

      • Family Constitutionpower of attorney deed
      • Company Constitution
      • Shareholders Agreement
      • Family Trusts
      • Powers of Attorney
      • Powers of Guardianship
      • Family Company Formation
      • Enterprise Structuring
      • Business Model Definition
      • Loan Agreement
      • Family conflict evaluation and resolution
      • General Security Deed
      • Joint Venture Agreement
      • Collaboration Guide
      • Cognitive capacity assessment for agreement signature
      • Enterprise Architecture (Collaboration) Questionnaire
      • Enterprise Architecture (Organisation) Questionnaire
      • Business Strategy and Asset Evaluation Questionnaire
      • Establishing personal representation for pre and post-death requirements

Protecting financial investments and personal relationships

In the 2020s the greatest levels of wealth will continue to result from creativity and the laws that make it possible to build and hold wealth. For that creativity risks mount when there is minimal definition of innovations, business models, personal or real property or intellectual property. Without documentation the risk is:Things fall apart; the centre cannot hold; Mere anarchy is loosed upon the world.”[2]

With escalating change unknown unknowns, knowledge gaps and errors in knowledge will remain as common chasms of death[3] in business. One novel reason for that is this. Adoption of the internet reduced the cost of production and distribution of information as well as of misinformation (false or inaccurate information) and disinformation (false information which is intended to mislead). The cloud can be bad.

I’m convinced. Speaking from personal and professional experience, if you or I were asked by a friend or relative to become involved in a business start-up, each of us should invest in an independent professional to be a lead adviser. Their questions, documentation and protocols will serve the interest of all to protect the financial investment and the personal relationships.

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[1] Ryan, Colleen (2013) Fairfax: The Rise and Fall. Melbourne University Press; Williams, Pamela (2013) Killing Fairfax: Packer, Murdoch and the Ultimate Revenge. HarperCollins.

[2] Yeats, William “The Second Coming”, poem written in 1919, published in 1921.

[3] Moore, Geoffrey (1991) Crossing the Chasm. HarperCollins.

Credit for photographers via Unsplash: Helena Lopes top and second photo. Austin Distel, third photo, Daria Nepriakhina, fourth photo. You X Ventures, fifth photo.

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