As we’ve all heard many times before, doing business with friends or family is risky and, despite the best of intentions, often turns into disaster. Yet it’s such an easy trap to fall into, as it feels right to work with people we trust, like and even love. This is the lesson that Josh Lindsey learned the hard way. Lindsey, who now serves as CEO of PHX Private Equity, says he’ll always regret launching a business with two of his closest friends. Though the startup was successful, it cost him more than what it was worth—two friendships.
The story stretches back to 2004 when Lindsey and two close friends were working together at a financial services company. The three colleagues balanced each other out, making a successful, well-rounded team.
“They were both sales directors responsible for training sales staff and closing sales calls. I had worked on the administration side close to the owners understanding the marketing and infrastructures needed,” Lindsey recalls.
As they worked together during the next two years, the three friends dreamed of breaking off and starting their own company. By 2006, they were well on their way to making it happen. Lindsey invested $20,000, his entire savings at the time, to launch the financial services startup and it quickly took off.
“In the beginning our growth and excitement was incredible. Within three months of launching, we subleased 4,800 square feet and had 35 employees,” Lindsey says. “Within a trailing 12 months of business, we had done $12 million in gross sales. This is an incredible number for a small business selling financial education products.”
The company’s growth skyrocketed during the next several months and the three friends—though working round-the-clock—loved every moment of it. But by year two, Lindsey knew something was wrong. The three partners, he says, became consumed with growth and profits and let value slide. Lindsey explains: “We spent so much time and effort on growth and sales that we started to accumulate customer complaints. This required us to refund some clients and spend money to put in checks and balances. Because we did not have checks and balances in the beginning, the three of us pointed fingers at each other to place blame; however there was no one really at fault—it was all our faults.”
Though the partners had repaired the damage with their customers, disagreements about the company’s direction began to mount, causing a major rift among the friends. Lindsey was soon thereafter voted out of the business. In two short years, he went from having it all to losing his business and, more importantly, two of his closest friends.
Lindsey describes the experience as “painful” but acknowledges the lessons he learned throughout the process are invaluable to who he is today. He hopes others who are considering doing business with family or friends can learn from his experience. He describes the primary takeaways learned:
Have realistic expectations. If you both make the promise upfront and out loud that your relationship means more than any business, you will most likely stick to that moral compass regardless of what happens.
Talk it through. So much of what happens in business—both success and failure—comes down to communication. Be upfront about what you expect so that both parties can make an educated decision as to whether it is a fit.
Value relationships more than money. Take pride in delivering results for your clients and the money will come. I believe money comes easy to those who understand this best.
Know that nothing lasts forever. Enjoy the journey, be grateful for your success and growth, and understand that there will always be another deal. So enjoy the one you’re in right now and prepare for the next.
Know that you may end up with the short end of the stick. Ask any successful business executive and they will most likely have a few war stories of their own. We all get an unfair deal in life somewhere along the line, but it’s how you respond that matters.
Launching a business is tough and the reality is entrepreneurs often depend on help from friends and family to make it work. Lindsey says despite his painful experience, he would do business with friends again—but very carefully. He recently worked with a close friend on another venture where he was able to put the lessons learned from the first experience to use.
“My wife was so worried that if things went bad, I would lose that friendship,” he says. “I told her that I was committed mentally that no matter what happens in this deal, I will not lose the friendship. Turns out the deal went south and there were in fact plenty of times I could have erupted in frustration. I remembered my commitment and handled it appropriately. We are still friends and I am thankful for my commitment.”
Though he will work with friends, Lindsey says he won’t work with family. “For some it works and works really well. I’ve seen families create almost a dynasty of wealth, especially in a family state like Utah. But for others it has caused divides that can’t be repaired. I think the decision to work with family should be thought through with extreme care and understanding.”
In the end, Lindsey says the biggest lesson he’s learned is relationships are more valuable than money. “It’s easy to make money. It’s hard to find friends and have quality relationships. No business or deal is worth ruining a true friendship. There will always be another deal and another dollar to be made.”