Small Business

5 Dangers of Doing Business With Family and Friends

By Michael Hess

Updated on: October 21, 2011 / 2:48 PM EDT / MoneyWatch

When it comes to doing business with friends and family, blood isn't always thicker than water. Despite the best of intentions and the highest of hopes, what starts out as a seemingly "safe," mutually-beneficial project or interaction can turn into anything from a minor embarrassment to a major nightmare.

I'm not talking about running a family business -- that's a different topic with a whole host of its own risks and challenges -- I'm talking about buying, selling, and doing deals with pals and kinfolk.

Here are five common pitfalls:

You lose their money: This is always the biggie. We always hear "Don't invest money you're not prepared to lose," and I'm sure most people do feel that way when they put their money in the hands of a friend or relative. But when that money goes down the drain, people tend to become a lot less philosophical. They may say "Hey, don't worry about it, I took the risk," but in all likelihood your relationship will forever be tainted -- whether subtly or dramatically -- by the experience. Family money is often said to be the easiest to get, but it can also be the most expensive.
A deal goes bad: A good friend of mine recently did a real estate deal with one of his close relatives. They thought it'd be a hoot and they'd make a few bucks together, never anticipating that anything could possibly go wrong. But when some critical issues came up, they wound up at an impasse that turned ugly and expensive. Let's just say they're no longer as close as they used to be. Just like in any business matter, no matter how foolproof you think a plan may be, it's wise to assume things can and will go wrong. And "family wrong" can be much worse than "business wrong."
The business comes to the family picnic: There are people who can completely shut off work and draw a solid line across their lives when they close the office door behind them. I admire such people, though I know very few of them. The rest of us inevitably bring our working lives home with us in one way or another. When you do business with family and friends, at some point you'll be with them at a barbecue, birthday, cocktail party, or wedding. If there's tension (or worse) brewing between you, aside from your own discomfort, it will affect -- and potentially infect -- those around you. The result can be anything from short-term awkwardness to a full-on Hatfield/McCoy disaster.
You can't un-ring the bell: Once you remove the "arms-length" and start doing business with people who are close to you, you often start down a course that's hard to change or reverse. Whether it's setting expectations (free or discounted products and services), or creating problematic assumptions ("I thought I was going to get a cut of all these referrals"), changing or getting out of friends/family dealings is much harder than business-as-usual.
There's collateral damage: I've been in several situations where I've gotten involved with friends or family peripherally, by networking or making business connections for them. And a couple of times it came back to bite me. I've introduced friends to my own important business contacts, only to have that introduction turn sour. We all like to think that grownups can keep clear heads about these things, but again, human nature is such that it's always easy to be calm and philosophical going in, much harder coming out. If you decide to play matchmaker, make sure it's very clear to all parties that you are simply making an introduction, the rest is completely up to them. In fact, I'll often come right out and say (only semi-humorously) "don't blame me if you wind up hating each other," just to put it out there. In fact, if you have any hunch that you might be making a risky connection, it's best to bite your tongue.

Of course it would be great if doing business with those closest to us was a risk-free, rewarding pleasure. Certainly sometimes it works out fine, but often times it doesn't. As with many things in business, it is helpful to try to anticipate the worst-case scenario (a mildly ticked-off acquaintance, personal embarrassment, a relative who never talks to you again), and consider the reasoning, benefits and alternatives. Decide if it's a risk worth taking, and if you can live with the possible consequences.

Remember, even when there are no strings attached, there are always strings attached.

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