Ben & Jerry’s was started by childhood best friends. Four grad school buddies founded Warby Parker. A long friendship-turned-partnership brought Clear to TSA security lines across the U.S. A shopping trip between two pals launched size-inclusive clothing brand Universal Standard.
Yes, stories of successful business partnerships between friends exist. But for every Ben and Jerry, there are countless Janes and Joes ticked off at their college roommate for stiffing them on a business loan.
Mixing business and friendship can tank a relationship. So, if a classmate, colleague or childhood friend asks you to invest in their business, you need to look at it from all angles.
THINK LIKE A PROFESSIONAL INVESTOR
Don’t let your personal relationship cloud your business judgment. Evaluate the request as if it was coming from a stranger.
Does the business offer something unique? Does it fill a need in the market? Does the founder have business acumen? Do they have experience in the industry?
“A professional investor always wants to see where the ‘Aha’ is,” says Dileep Rao, clinical professor of entrepreneurship at Florida International University. “Is this likely to become a major company? If the potential is huge, it makes sense from a financial perspective.”
You also need to know the terms of your investment and what you’re getting in return. If your friend is asking for a business loan, discuss the repayment timeline and interest.
If your investment is in exchange for equity, review the terms. Is it solely a financial transaction, or will you have access to and input on business operations?
A handshake deal doesn’t cut it, even with — or especially with — lifelong friends. Make sure everything is in writing if you opt to invest so there’s no confusion down the line.
ALWAYS, ALWAYS STUDY THE BUSINESS PLAN
Examine the business plan to see if your friend has thought through all aspects of the business.
A thorough plan should include financial projections, current revenue, five-year projections and a detailed market analysis that outlines competitors and potential obstacles.
“You have to do your due diligence even if you have known the person your whole life,” Dimitrios Mano, an entrepreneur, said through email. Mano co-founded Bloom Express, an online CBD marketplace, in 2019 with a close college friend while the two were still in school.
Outside of his co-founder, Mano did not approach friends or family for a startup business loan. The duo relied on personal savings and income from their day jobs.
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