Momentum Podcast: 36
Should You Do Business With Family And Friends?
by Alex Charfen
Last week, I had massive, overwhelming anxiety. Here's why, I was sick. I was actually sick from before the 1st of July, until about Saturday or Sunday, so over seven days.
Working with a friend or a family member can be a privilege, but it must be approached in the right way. Let me share with you some of the mistakes I've made and the understandings I've come to that make working with family and friends an exciting opportunity rather than a destructive decision.`
Full Audio Transcript
Welcome to episode 36 of the Momentum Podcast.
I'm Alex Charfen, and this podcast is made for empire-builders, game-changers, world-makers, shot-takers, and creators of all kinds: those among us who can't turn it off and don't know why anyone would want to. We challenge complacency, destroy apathy, and we are obsessed with creating momentum so we can roll over bureaucracy and make our greatest contribution. Sure, we'll pay attention to their rules, but only so we can bend them, break them, and rewrite them around our own will. We don't accept our destiny; we define it.
We don't understand defeat, because you only lose if you stop, and we don't know how. While the rest of the world strives for average and clings desperately to the status quo, we are the minority, the few who are willing to hallucinate there could be a better future, and instead of just daydreaming what could be, we endure the vulnerability and exposure it takes to make it real. We are the evolutionary hunters, clearly the most important people in the world, because entrepreneurs are the only source of consistent positive human evolution, and we always will be.
This is episode 36 of the Momentum Podcast, "Should You Do Business with Family and Friends?" Let me give you a little history on this topic before I jump in with the answers, should you or shouldn't you. You know, this is something that I've struggled with for my whole career, because I have a hard time having friends that I don't do business with, and I have an even harder time not becoming friends with the people who I do business with. So for me, this has been a muddy, kind of difficult place my entire career.
And given how much I've studied business, and studied success, and looked at what makes companies successful, it's hard to deny that some of the most successful organizations in history, some of the most successful companies in the world today, were created by family businesses. When you look at Walmart or Ford or Johnson & Johnson, those companies may not be what they once were, but they are incredible family dynasties that survive today. You know, when I ran across one in specific, I was so impressed by the McIlhenny family that puts out Tabasco. Such a simple product, but what incredible market penetration they have on a single skew. One bottle of a pepper sauce, every restaurant you go to, every supermarket you go to, they have Tabasco, and it is a family-run business and has been for generations. Why? Because they've done it right.
Now, I'll admit very candidly, this is an area that I have completely screwed up. I have gotten excited about doing business with friends, and approached it in entirely the wrong way. I have done business with family and not been clear, and not really put the right safeguards in place, and had that blow up on me. I've made investments with friends where, very candidly, Cadey and I have lost hundreds of thousands of dollars because rather than do the right things, rather than approach it the right way, I approached it with excitement and trust, and the feelings that we want to have when we're dealing with friends and family.
However, when it comes to business, we need to look at doing this the right way. When it comes to business and doing business with family and friends, there is a way to do this so that you increase your potential for success, you give yourself a better shot at actually having a good outcome, and you lower the chances that you're going to have a really challenging outcome. And, to be candid, some of the most challenging business deals I've ever done, some of those with the most hurtful and frustrating and challenging fallout that I feel like I still deal with, that I still struggle with, have been when I didn't follow the rules that I now understand when it comes to doing business with family and friends.
So let me share three simple rules with you, three ways that you can ensure that you can do better with family and friends. But first, let me describe a scenario I was in. A few years ago, a friend of mine approached me to invest in a restaurant, and his family was successful restaurant owners, they had tons of different restaurants, tons of different retail outlets. I thought I was joining an organization that was going to be very successful, and they had been very successful, so I got excited about it. It was a quarter-of-a-million-dollar investment, which is huge for anybody, even for Cadey and I. That's not a check that anyone writes in an easy way, or anyone writes in a flippant way. I don't care how much money you have, $250,000 is a fortune. And I, quite candidly, screwed up. I didn't follow the advice I would give somebody else, the advice I'm about to give you, and here's what happened in that case. I got involved in a deal where I didn't do what I'm about to share with you, and it was a friend that sold me into the deal, it was a friend that encouraged me to do the deal, it was a friend that was bringing the deal to me as "Hey, this is something you should do." And because I didn't follow this advice, it ended up where the deal didn't go well, and we lost most of that money, and it doesn't matter what I do, I can't think of that friend in the same way. It's permanently challenged and tainted our relationship, because I feel like I got sold one thing and delivered another.
But the fact is, I have to take responsibility for it, because I didn't follow the following three rules. Let me share them with you. The first one is, when you're doing business with family and friends, this is an easy one: Do more due diligence, not less. Don't rely on the relationship; rely on doing due diligence. So here's what you do. When you're in an investment, investigate that investment like it wasn't a friend, investigate that investment like you're not doing it with a family member, and ask yourself, "Would I do this if it wasn't a friend or family member involved?"
If you're hiring a friend or family member ... Which, by the way, I've worked with my wife for over 12 years. I hope to work with my daughters someday. I worked with my father when I was a kid. Family businesses are incredible. Some of the most successful organizations I've ever worked with have couples running them at the top. Dave and Gail Liniger are the powerhouse behind RE/MAX, and I don't think Dave could do it without Gail, and Gail could do it without Dave, so that's a family business that has changed the face of real estate. But when you're looking to possibly hire a friend or family member, here's a rule. So it's more due diligence, not less; you investigate your investment deals. When you're going to hire a friend or family member, interview at least three people first, because you want to make sure that that person is not only the friend or the family member, but they're the best decision, they're the best choice.
If you do that due diligence, it'll actually help you make this whole thing better, it'll help you be confident, it will help you understand that you made the right decision. And six months in, when you've hired a friend or family member and you start experiencing challenges with it, you'll remember that you did interviews, you made the right decision, you should lean in and make it work. When you rush off and hire a friend or family member, or someone recommended by a friend or family member, you don't interview other people, you're always going to wonder in your back of your mind, did you make the right decision? The third part of doing more due diligence is, have someone else give you their opinion. Have a third party you trust investigate your investment deal. Have them look at the people you could possibly hire, ask questions, and make sure you allow for other opinions there, because the very fact that you're doing business with family or friends is going to jade your opinion. It's going to make it tougher for you to see what's really going on.
So, step two, the second part. First is more due diligence, not less. If you're going to hire a friend or family member, you owe it to yourself, you owe it to them to do more due diligence, not less. The second one is, function under clear expectations, not excitement. One of the biggest challenges of doing business with a friend or a family member is that we're excited. We're excited at the prospect of working together, we're excited at spending more time together, succeeding together, winning together, helping that person. So often, when we're working with a friend or family member, we think, "Wow, this is going to be a huge break for them."
And all of those things are true. However, here's how you can operate with clear expectations so you maintain the excitement. Understand up front what's expected from both parties. Like, make sure they know, make sure you know. Don't let your excitement overrule proper preparation, and really getting clear on what you're doing and how you're doing it. And understand that this is going to be more difficult, not easier, at the beginning than working with somebody that you just hire, because there's going to be expectations on both sides. You want to make sure that you meet those expectations, that they're clear, and so if you start with clear expectations rather than excitement, if you get the details down, and then you understand what's going on, then you're going to have a much higher likelihood of success.
And the third part ... [inaudible 00:09:38] ... The third part is that everything that you do with a friend or family member should be in writing. Make sure you understand the deal going in, it's easy to understand, impossible to misunderstand, you've clarified expectations for all parties in writing. Second part is, you get the details down. Like, understand what the details are. What are they responsible for, what are you responsible for? Why are you entering into this agreement to work together? And have clear accountability and responsibility.
When I review this list, and I think of that $250,000 deal that Cadey and I lost on, when I look at the first one, "more due diligence, not less," you know, I did less due diligence than I've ever done on an investment deal, and I lost our money. I even had an attorney who reviewed the contract tell me that the contract was not in my favor, and that I should be really careful, and I told him, "It's okay, I trust ... It's a friend of mine, I trust him, I'm excited about it," and I overruled doing more due diligence. That would have saved us $250,000 and would have saved one of my friendships.
The second one, when I look at that deal that I did, "clear expectations, not excitement," absolutely missed on that one. You know, I was sold a deal that almost immediately changed, once we cut our investment check and it was cashed. What we were told, and then what we were presented with in writing was completely different afterwards. The excitement overruled me getting clear expectations and understanding exactly what was going to happen in that deal. And then the third one, "get everything in writing, make it easy to understand, impossible to misunderstand," in that $250,000 deal, I was so excited to make it happen, so excited to join success, so excited to work with a friend of mine, to have an investment deal, to have the income, the revenue, everything that was promised, we got barely anything in writing, other than the contract that my attorneys told me wasn't in my favor.
So I overruled all three of these. I did less due diligence, not more, I didn't have clear expectations, and we didn't have everything in writing. And as a result, we lost $250,000, and I can't help but feel taken advantage of by my friend. But the fact is that I have to take the lion's share of the responsibility, because I didn't do the due diligence, I didn't have clear expectations, and I didn't put everything in writing. The fact is that, had I done that, I never would have done that deal anyway. And here's what I know. If you follow these three rules — do more due diligence, have clear expectations, not excitement, and get everything in writing — you have a high likelihood of doing a deal that will work out. If you're considering hiring a friend or a family member, it can be one of the most progressive moves you can make for a business, but make sure you interview other people, you make sure that they're the right person, and you know in your heart that you've done all the due diligence you need to. Because some of the greatest organizations in history have been family-run businesses, but some of the greatest organizations in history that could have been have been taken apart by familial relationships or friendships that have gone bad.
So as an entrepreneur, it's unlikely you will be able to avoid the decision "Should you do business with family or friends?" and it's highly likely that if you do it for long enough, and you're in business for long enough, your business associates will become your friends and feel like family. But if you follow these three simple rules — do more due diligence, not less; have clear expectations, don't run with excitement; and get everything in writing — it's going to make it a lot easier for you to have a successful outcome. Thanks for listening to the Momentum Podcast. Do me a favor, share this with your friends, leave us a review on iTunes, and let people know that this podcast, if they're like us, will help them create momentum, get clarity in their lives, and move forward, because we all go forward faster together. Thanks for listening.