Caution -Friends, Family and Business can but don’t always mix smoothly!

Written by Graeme Couch on 11 March 2016.

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While bitter experience can be an unforgiving teacher, others’ insights can be valuable when considering partnerships, small to medium enterprises, family business arrangements and the like.

Recently asked by clients looking at taking a role in such a “venture”, I observed that it could be useful to consider it as being part of a “complex adaptive system”, and to “manage” their involvement as such.

You (the clients), and each other person involved, are all “agents”, participants in the ventures (even if you are a so-called “silent partner”); you are not separate from them.  In line with my No.1 tip for 2016, “to see the world through others’ eyes”, it is vital to understand all the participants and their circumstances, not necessarily entirely agreeing or disagreeing with them.  (see https://www.linkedin.com/pulse/managing-complexity-2016-seeing-world-through-others-eyes-couch?trk=pulse-det-nav_art ).

• Commonly, the most difficult agents to characterise are first oneself (self-awareness is never complete), then friends or family or where new proposed arrangements intertwine with prior relationships.

• As a general rule, all agents behave adaptively – seeking their own opportunities and adopting strategies that maximise prospects for success in their own terms – whether individually or in concert with others.

• Inevitably, their interests are partially (and imperfectly) aligned to yours (and may indeed conflict).   The alignment (or potential mis-alignments) need exploration. 

• In particular, any relationship formed in one situation can be quite different to relating in another.   Most commonly the relationship between salesperson and prospect changes when they become service provider and customer (or debtor and creditor).  Family and friendship relationships may be especially difficult to unravel but failure to do so can often end in disappointment.

On understanding the key players and their relationships, you can better explore the usual (strategic performance and planning) issues when investing, such as:

• Capital structure.

• Intended application of funds raised.

• Marketing.

• Supply arrangements and scope for “second” sourcing.

• Products development and ownership.

• Business, Management and People.

• Assets and liabilities.

• Prosecution/Litigation (actual or potential).

• Security, logistics and IT.

Some things I look at, depending on the particular case, are:

• Governance – arrangements for proper auditing and reporting.

• Ownership and control – concentration of directors, limitations in rights to sell/buy interests.

• Gearing, and the obligations/rights that go with existing financing.

• Competitive advantage, and “moats” against erosion by competitors or new technology.

• Sources of IP and other assets, what is their value and applicable commercial arrangements.

• Dependence on individuals (who may leave, default or die etc.), and any weaknesses or vulnerabilities.

• “Non-commercial” arrangements such as employing (and according special treatment to) family members.

• If funds being sought are to be applied to supporting operations or working capital (rather than capital investment).