Should You Invest in a Friend’s Business?

Business

Doing business with a friend is a tricky situation to be in. As much as you want to help your friends with their business ventures, this is money we’re talking about. You’ve worked hard for it. You tried to make the right calls in your career and investments. It isn’t easy to just write a check because your friend tells you this idea will be a huge hit in the market. What if those promises didn’t happen? Sure, money could be recuperated (though for long, we can’t tell), but what about your friendship? Will you ever trust your friend again?

Be Logical

If your friends want to start a pool water filtering service business in the middle of nowhere, do you do it? Do you join them in this crazy idea of theirs? What good would it do to have a pool business in a place where there are no swimming pools? Your friends’ ideas might not be that crazy, but you do get the point of being logical in your decision.

Just because a friend is selling you an idea doesn’t mean you should buy into it. Above all else, logic takes precedent when you’re deciding to invest in a business. You have to study the business plan and see if it’s targeting the right market.

Make Demands

Treat this investment as you would any other business you’re interested in. How much should you receive in exchange for your investment? Should you get a share of the company?  Do not short-change yourself just because a friend is offering the opportunity to you. Assuming that you’re using your family’s money as capital, you have an obligation to them to make sure your investment will pay off.

Negotiate to receive a percentage of sales that you’re comfortable with. Make sure that the terms of the contract are fair for all parties. This way, you’re protecting your interests and that of your friends’.

Establish Rules

If you approach another potential investor about the business, what would that investor ask you? The investor will want to see a business plan, details of the roles of the officers, and an understanding of who has the final say in important business decisions. You can’t say you’ll figure these things out as the business grows. It is important for business partners to establish ground rules. Otherwise, you’re looking at legal troubles in the future.

Evaluate Your Potential Business Partners

Business Planning

Who will be your business partners? Are there others who were invited to invest in this business? You have to do a SWOT (strengths, weaknesses, opportunities, and threats) analysis of everyone involved in the business. You have to make sure your friend can manage a business. If you are not confident with how responsible your friend can be as a business owner, then what are you doing negotiating in the first place?

Get It in Writing

When getting into a business with anyone, you should have things written down legally. A contract is required. You may even hire the services of a lawyer to legalize all agreed-upon terms. If your friend doesn’t feel comfortable doing this, then don’t go through with it. You cannot let your friendship dictate where the business is going.

If there’s money involved, you have to get everything in writing. This agreement will guide your future actions. It might also help save your friendship in case something goes wrong with the business.

Don’t Invest Money That You Can’t Afford to Lose

People invest only when they can take a risk on that money. There is no assurance in business. You do the best you can to market the business, but that doesn’t mean all the hard work will pay off. Sometimes, it takes years to get a business to work out. That means your money will be tied to the business until you make it big. Many times, hitting it big doesn’t happen at all. Instead, the business will get a good portion of the market that’ll eventually allow you to recuperate your investment.

But even if you can afford to lose money, do not be reckless with your investments. You may trust these people as friends, but do you trust them as business managers? Do they have the skills to grow a business? If you cannot see their potentials for becoming successful business owners, then this is not an investment you should make.

You have to think hard about doing business with a friend. Though some friendships and businesses thrive together, plenty of relationships were ruined because of differences in business opinions. This is not something you decide about lightly.

Scroll to Top