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Memorandum of Understanding for Business-Friendship Partners

Memorandum of Understanding for Business-Friendship Partners

Applicant: Ms. Wu
Nationality: Taiwanese
Applying For: Memorandum of Understanding
Time: 3 days
Challenges:

  • Client and her friend want to go into business together
  • Building a plan before there is even a product
  • Needing to think out steps 1-5 to even do step 0
  • Avoiding the pitfalls of friends doing business together

 

BACKGROUND

There are numerous horror stories involving your friends in your business enterprises. A simple internet search of “business and friends” will get you a few billion results of why you should absolutely never mix friendship and business. All the stories are the same. Two or more friends have a great idea, they go into business together, the business goes sour or money becomes an issue, the friends have a massive falling out and can no longer work together, the business dissolves, and the friends never speak again. This happens to people who, excited about the possibilities of making money and working with and for their friends instead of soul-crushing bosses and corporate entities, rush into things without a clear plan and process. They leave things undefined and unclear, and the argument always centers around those non-defined spaces of a business.

Ms. Wu had heard all of these stories before. Thus, when she and her friend, a Chinese medical expert, started to have the idea to go into business together, she was hesitant. Would they become the next people to join the list of failed business-friendship partners? However, Ms. Wu was an experienced businessperson and she knew that many of the pitfalls of mixing friendship and business could be avoided with well thought out preparation and diligence. She also knew of our firm through our previous dealings with her, so she set up a consultation with us to see if there was anything that we could do to help her and her friend avoid all of the issues of building a business together.

 

KEYS TO SUCCESS

Part of the problem with friends going into business together is that even if they think they’ve defined the relationship completely and left no gray areas, they might miss something that an outside representation would not. It is the simple problem of, “people don’t know what they don’t know.” Being aware of this, Ms. Wu came to us, and we decided to draw up what is called a Memorandum of Understanding (MOU). A Memorandum of Understanding is step 0 of any potential business partnerships. It can be done before the business has a product; it can even be done before the business has a name. All a client needs are an idea, and our firm can draw up terms to help anyone partner with their friends or family in a safe, defined way.

The MOU we drew up for Ms. Wu and her friend established the purpose of the business, responsibilities, and shares in the business, and doled out responsibilities to the creation of a viable business plan, doing research, recruitment, and incorporation along with deciding who was responsible for the establishment of a formal contract. It allowed for amendments to the MOU itself, covered confidential information, and potential termination of the document for various reasons. It was also legally binding in the state of California.

Where people go wrong with Memorandums of Understanding is when they attempt to do it themselves and they end up with either a document that is either too flexible and thus doesn’t provide enough definition, too inflexible and thus cannot react to the changing parameters of business, or is not legally binding, making it useless.

Another pitfall that people experience when attempting to make Memorandums of Understanding is that, to do this step 0, you have to think about steps 1-5 as well.

“To even do step 0, you need to seriously consider steps 1-5. What good is a Memorandum of Understanding that defines your potential business as a skincare business if you end up selling probiotics instead? It’s not good. So, people who do this on their own, they end up rushing it without thinking about the next steps of the business process, and the MOU ends up obsolete or can even damage their partnership. Done right, it’s the safest and easiest way to avoid the problems of doing business with friends, so it’s a really worthwhile thing to get right before the business even starts.” – Joseph Tsang, Attorney

While all you need is a concrete idea to begin an MOU, you need to know enough about business to understand what a business plan entails, what formal contracts should look like, how to go about incorporating your business and who will be in charge of each of these steps, and a myriad of other business-centric steps. Because of the work our firm does, we go through a lot of business plans. We essentially specialize, for a brief time, in each of our client’s businesses if their case involves their business. That makes us capable of understanding and visualizing steps 1-5 of a potential business when a client brings us something like the MOU. It allows us to better be able to draw them a roadmap to success while also covering all of the little things that might have gotten lost in the big picture of excitement that Ms. Wu and her friend were experiencing.

 

OUTCOME

In just a few days we counseled Ms. Wu several times. We talked to her about the next steps of the business, what she wanted to do herself, what her partner wanted to do, and we covered who should be responsible for each part of the business. Once we had those details in the MOU, we counseled her on the establishment of a future business plan. Both parties agreed to the Memorandum of Understanding happily, and Ms. Wu is currently working on a formal business plan and formal contract to form her business. Both she and her friend will have their entire business relationship defined, both parties will remain clear on their standing, and thus no one will be blindsided by misfortune or surprise. Ms. Wu is excited to see what the future brings to her and her friends’ business, knowing that now there is a low risk of the pitfalls that could happen if you go into business with your friend.

*Name changed to protect client privacy

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