Starting a Business With a Friend? 4 Red Flags to Watch Out For

Sometimes friendship and business don't mix.

Are you dreaming of becoming a small business owner? A lot of people have this dream, and chances are, you have friends who might want to join forces on a business idea. And all those business success stories that start with a few friends getting a billion-dollar endeavor off the ground in their parents' garage just make the idea even more appealing. If you and a friend think you've got a winning idea, here are a few red flags to watch out for along the way. Carefully considering these potential pitfalls can help you avoid an expensive and sometimes friendship-impacting mistake.

1. You lack a concrete business plan

Having a solid business plan is an important way to ensure success as you start your new endeavor. The Small Business Administration defines a business plan as "a written tool about your business that projects 3-5 years ahead and outlines the path your business intends to take to make money and grow revenue." While you may not be planning to start the next Apple or Amazon, getting your plans and ideas written down in a concrete form can be a great way to help steer your business, pick your goals, and possibly even get funding.

If you and your friend haven't tackled this, or if you've been trying to get them to sit down and make a plan and they're avoiding the conversation, that's a red flag. It should make you question whether your friend is as serious as you are about your business idea.

2. You're putting in all the start-up costs

There are small businesses you can get off the ground with minimal start-up funding, but having money to buy supplies, inventory, equipment, and software can definitely make the process easier. Plus, you can easily assess spending to decide if it's a good move to work with a friend.

If you haven't gotten a small business or other loan and are going to cover the initial costs of the business yourselves, who's responsible for what? If it's always you whipping out the credit card or writing a check, think twice about your plans.

3. Your friend has mismanaged their finances in the past

Far be it from me to criticize other people's money management skills, but your friend's could be a potential red flag if you're trying to decide to start a business with them. Is your friend always overdrafting their checking account? Are they carrying a bunch of credit card debt? Are they reckless with money and regularly spend more than they can afford? Starting a business requires austere money management.

Not only do you have to handle your spending and your profit, but you also have to worry about taxes and make decisions about business credit cards and other tools. It's a lot of plates to keep spinning, and you don't want to find yourself in trouble because of your friend's irresponsibility with money.

That said, if your friend has taken steps to get better with money, that could be a (cautiously) green flag. Starting a business can be a great way to apply one's newfound money knowledge.

4. You haven't considered the impact on your friendship

Finally, one last red flag can often be the biggest. Working together can really change a friendship, and if you and your friend are close, it could be devastating to watch your relationship turn strictly business or have your work hours overrun your personal boundaries. An upside could be that you already know each other well, and if you complement each other's strengths and weaknesses, you could end up being excellent business partners.

If you've got that million-dollar idea, a great business plan, fair shares of start-up costs, and a capable partner by your side, you're likely to find success with your small business. Just don't let the fun and excitement cloud your judgment when deciding whether to partner up with a friend.