5 Things To Consider Before Working With Friends And Family
By Paul Esajian on April 19, 2019
Working with close friends and family can truly be some of the greatest experiences you will ever have. Conversely, if things go south it can also be some of the worst. Prior to jumping into a partnership, it is essential to make sure both parties are comfortable with the arrangement. If there are any doubts or lingering questions you need to get them out of the way now, before getting too far. If not, you will end up arguing, fighting and eventually the partnership will come to an abrupt end. Friends and family are too important to lose over a spoiled business relationship. As excited and eager as you may be, take your time and understand what you are walking into. Here are five things you need to consider prior to working with friends and family.
- Existing Relationship: Relationships are based on past experiences, trust and mutual respect. Before getting too far it is important to take a step back and examine your relationship. Simply put, just how well do you know each other. Regardless of what type of investing you are interested in you will be in close contact during the project. There will be several calls, emails and texts throughout the course of the day. If you don’t personally like or want to be around your partner you may be better off not working together. This doesn’t mean you can’t be close but working together is a different animal. Your partner will often represent you and your reputation will be impacted by their actions. Make sure your partner is someone you can always speak openly and honestly with. Things in real estate don’t always go as planned and there will be tough decisions to make along the way. The stronger the existing relationship, the strong the partnership.
- Financial Considerations: Money is always a difficult conversation to have. However, if you plan on partnering up it is the single most important item for discussion. You need to know how much each party plans on contributing to the transaction, who is covering miscellaneous expenses and how will the profits be allocated. There should be no part of the finances and expenses that is not discussed. There are plenty of partnerships who take a wait and see approach, only to run into trouble after their deal closes. One side feels they should get a bigger piece of the pie and inevitably becomes upset and ends up walking away. You should go through every step of the process and break down each anticipated expense. Assign which party will cover the expense and how they will do so. Next, talk about the elephant in the room in how profits will be split. Don’t end the conversation until both sides have come to a mutual understanding and agreement. If you get the financial piece of the partnership out of the way, you clear a very large hurdle.
- Work Allocation: Next to finances, work allocation is the most important conversation to have. The best partnerships are the ones with clearly defined roles. It is when one side feels they are doing too much, that a partnership is doomed. There is a lot that goes into buying and flipping a property. Most short-term partnerships focus on fix and flip rehab deals. With that there is property acquisition, scheduling, organizing work, selecting products, design and budgeting. This is all prior to the property going on to the market. You should come up with a flow chart of all the work and tasks that are needed and simply assign it to a partner. If one party is just a financial partner the other needs to willingly take on this side of the deal. It is also important to discuss how you will make decisions. Many decisions need to be made in the spur of the moment or without waiting days to do so. Discuss the process for making these decisions and who has the ultimate veto power.
- Worst Case Scenario: Most partnerships start with discussions of wild success and great financial fortune. Very few, if any, talk about the worst-case scenario. Thinking about potential problems doesn’t make you negative and pessimistic. It makes you prepared and ready to face whatever comes your way. You should talk about what you would do if you run out of capital and need more money. How about if the property faces unexpected damage or the town won’t let you do the additions you anticipated? What about if your list price is too high and you are forced to entertain lower than anticipated offers? There are several things that can throw a monkey wrench in your plans. You should have a conversation on how you would act before the inevitably do.
- Length Of Agreement: Do you plan on working on a one-off deal or making a business out of it? If a deal comes your way from an independent source, will you work together or keep those deals separate? It is important to define your partnership terms before other deals come your way. Start by defining the length of your agreement. It is ok to start with one deal and see if you are a good fit for each other. However, your business doesn’t stop and there is a chance you will be presented with other opportunities. As long as you set boundaries and state your working relationship, there should be no problems.
Working with a partner has a set of definite advantages, if done right. Regardless of how well you know someone, working together is different. Always take the time to review these five important areas prior to committing to each other.