Tuesday, July 7, 2020

When your friend/relative asks you to start a business together

Yesterday I slept 6 hours and 28 minutes! It was a great day but I am currently in a contemplative mood because... I am in a typical young-adult-middle-aged person standard dilemma:

Your friend/relative asks you to start business together.

It starts with a phone call and you like the idea, it has potential.

Then you meet each other and it's a little weird because there are strangers in the room who may be your potential business partner.

You suss each other out and things are pretty chill. It's exciting because everyone in the room wants to make money. You shake hands and look each other in the eye.

And then if you're Type A like me, you start the next morning kickstarting the business process and start getting into the gritty details.


Red flags to lookout for when entering a business partnership/joint-venture

1. You have no control of the revenue. You can't see where the money is coming from, when it's coming, what the payment terms are like. You have to trust your partner when they says it's a great money-making idea; there is no other idea like this in the market. They literally told me the product will sell itself and customers will breakeven in 3 days. Sigh.

I actually had a friend who quit his job, took on a RM100,000 personal loan to work on a startup. He was going to be the Tech guy and his friend was going to do the sales part. Turns out the sales guy couldn't deliver and he went into RM100,000 debt with nothing to show for it. He is now back into working for a nice big company and earns a nice steady paycheque. Kids, if you want to do business you need to always be aware and in control of where the revenue is coming from. I have heard plenty of stories of tech guys who have failed start ups simply because they trust other people to generate the sales for them.

2. Everybody is happy for you to foot the whole bill....You should draft a budget and then everyone should chip in some money depending on their company share. If your partners don't have any skin in the game, they are not going to go all out 100000% to make sure the business is a success. Why should they?

3. They are not keen on getting a lawyer involved. If your friend says "trust me, I won't cheat you one" then that person is going to cheat you even if there is only one thousand ringgit in the pool money. It is what it is, please get a proper contract in place to save yourself headache in the long term. The lawyer fee for such as contract costs around RM10,000 including advise on the structuring.

Profit sharing or 49% shares? 

I also learned something important - between shares and profit-sharing, always choose shares. This is because if you opt for profit-sharing, it means you need to do due diligence and audit the business every year. This is to prevent the main business partner from telling you every year that the business did not make any profit even if it did make profit.

Can business partnerships/joint ventures in Malaysia work? I asked my dear lawyer friend what the chances of the business succeeding is. 

Basically, her take is if you really want to support a friend/relative's business then just provide investment money and be a silent partner, then charge a percentage over the investment sum to be paid over a few years. And also, get that signed in a legal contract.

So.. are you going to do it?

I don't know yet. The nice thing about partnerships is I get to go into any business with Jeffrey who is my normalising, rational sounding board. Plus, this was his idea in the first place ...

I hope this will be a useful post for those of us who receive business invites (if you are Malaysian above 25 years old you will receive at least THREE invites in your lifetime because Malaysians are a very entrepreneurial bunch). Business partnership is great but I much prefer steering my own business destiny, it is hard for me by nature to partner with other people even if this is the best path to making more money.

Time will tell if this is a setback or positive survival trait for me.


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