Buying a business with family or partners?

When buying a business, especially for the first time, there can be a lot of anxiety involved. Many buyers are concerned they may not be as successful as the previous business owner. One way to alleviate that burden is to have a trusted partner by your side. Whether your partner is a spouse, business associate, family or friend, one thing is certain: You need a specific plan in place.

At the minimum, partners should have specific job descriptions with specific duties each will handle. Another factor to consider is an alternate plan. If one of the partners becomes ill, dies become incapacitated or simply wants out, what will happen? You may love your partner but not their heirs. A buy-sell agreement should be in place before you ever close escrow on the business and is an integral part of any partnership.

Additional concerns that should be addressed between partners are how the profits are shared or split and how any financial issues will be addressed. Having an agreement or understanding upfront is essential. Expect the unexpected and plan in advance for the worst case scenario.

When you buy a business and will have partners involved in the ownership or directly involved in running the business you need to consider additional factors to ensure a successful partnership. Let's discuss some positive and negative aspects of their involvement:

Positives

Rowing the same way: Having a family member or close friend working with you after you acquire an ongoing business can be a great benefit if you start with a shared understanding of how things will be handled. If you decide upfront who has the final say and what areas each partner will be responsible for, a positive smooth initial start to your ownership should be achieved. There is a huge benefit to customers and employees who will be impressed that the business will have multiple people working together on a common goal to continue the success of the business.

Loyalty: If you know one of your partners well, the peace of mind of not having to worry if your best interests are always being taken care of is a great relief and strength for your business.

Sounding board: The operation of a business can be very stressful. With a family member, good friend or trusted partner involved, you have a built-in colleague who can help you run the business and can prove to be a valuable compass to get through any rough times you might experience.

Financial strength in numbers: Family partners or close friends can allay a series of financial dilemmas you might encounter if you were buying a business by yourself. A relative may help provide all or portion of the capital you need to buy the business. In some cases, they can be the guarantor who gets you enough cash or capital to get you to the financial threshold you need to reach in order to qualify for a loan to purchase the business. Partners who contribute money toward the purchase of the business immediately make it their business to provide support and in some cases provide a rainy day fund in case of some unforeseen financial need arises.

Negatives

Stuck with a lemon: When you go into business with a family member or a close friend, you should be sure the commitment and plan you have from your partner or partners is clear and defined. In one instance I have encountered in my career, a buyer purchased a business for his parents who lived out of the area. The verbal plan was they would buy their son out once they moved. After six months of headaches with a struggling business, the son received a call from his dad saying plans have changed and maybe the son should sell his business. The son is still recovering from this unexpected hitch in his plans. The immediate lesson to be learned is there was not a specific plan in place and the parents did not have ownership, making it easy for them to change their minds. To make matters worse, the buyer did not have experience in the type of business he purchased. making it very difficult for him to run the business.

Expect the unexpected: Stress and challenges of running a business will often make people react in unexpected ways. Even family members who think you know and trust with your life will react in ways you might think are unfathomable when they are put in a tense situation.

Don't wear rose-colored glasses: When assessing your partner, make sure to place reasonable expectations on them. Behavior usually does not change. A family member or friend who has been unreliable in the past usually will not change just because they invested in a business with you. If they cut corners before, expect the same behavior in helping you run your new business. If you are reasonable on what each partner can do based on an established track record, the partnership has a much better chance of success. And if you have a silent investor, do not expect them to be silent.

Role changes: Especially in the case where you act as a majority investor in a business, you need to consider one day getting handed the keys to the business if the family member or friend you invested with decides to get out of the business. Sometimes your partner has a solid reason for their decision. The immediate problem becomes your role changing from an investor to hands on management sometimes overnight. Plan for the worst-case scenario up-front. If you plan to be a silent investor, have an alternate plan in place if your partnership dissolves and you have to take the reins.

Investing in a business with a trusted family member, close friend or associate has countless benefits, yet the key to a prosperous and happy partnership is to have a solid plan with realistic expectations.

Jim Edlund, who has owned small businesses for 30 years, works with BTI Group Mergers and Acquisitions in Reno. Contact him at 775-828-5400 or jimedlund@business-team.com.