“By the end of 2004, I had lost just about everything, including the income I needed to live on and the clients that were the backbone of my business. I was feeling frustrated, hurt and angry. A split had occurred with my friend with whom I had partnered when I had launched my consulting firm in 2001," says Mumbai-based Sangeeta Rawat.

"In many respects, our partnership was like a marriage made in heaven. We were very great friends since childhood. We brought critical and complementary talents to our work. Our agreement was that my friend would handle back-office tasks, while I would personally visit the clients and get the business,” she adds.

Rawat is not alone in feeling betrayed by friends. There are many who have burnt their fingers doing business with friends. The implicit trust that most of us have when we deal with friends is our undoing. There are a number of reasons why quite a few business enterprises started by friends back fire.

Sam Vikas, a 39-year-old real-estate dealer in Delhi, faced a similar setback in 2001. "I've seen the collapse of two friendships. I had immense trust in my friends. Never did it occur to me - or to us - that our friendship of so many years would disintegrate. But a break up did occur. If we had had a written contract, all parties would have been protected. However, I lost both friendship and business. Today I have no proof to sue them for losses."

He goes on to explain his predicament, "What we lacked was an 'understanding.' By that, I mean a set of parameters from which to proceed if differences occur that cannot be resolved. In other words, in such a case, what would be the priority? Would the partners agree to terminate the business relationship for the sake of the friendship or vice versa?”

It's easy to believe that when you do business with close friends, you don't need any agreement because you trust them. However, nearly 70 per cent of all partnerships fail, usually ending in miserable and very costly emotional and financial conflict. Generally, the reason for failure can be attributed to the quality of the relationship.

People enter business partnerships with great excitement. "However, as in a marriage, the excitement needs to be tempered with a period of getting to know each other and finding out if your friend is truly well suited for running a business together. Lack of understanding and communication can affect the relationship leading to downward spiralling in business partnership," says S T Kakkad, a tax and business consultant.

Rama Murthy, a 55-year-old agarbatti exporter in Pondicherry says, "I've been in a few deals like this. I feel in a business, whether with friends or with a third person, one has to be careful about the two related but separate issues - ownership/equity and compensation. Ownership often reflects the financial investments made by the partners, and compensation reflects the time and effort they put into running the business."

He goes on to explains, "The ownership/equity split should not just depend on cash invested, but consider expected workload. The problem will be agreeing on how to value these inputs. Say one partner will invest 80 per cent of the capital but not work at all, another will invest 20 per cent and work full time, and the third can invest nothing but also will work full time. Agreeing on an equitable split can be tricky, particularly if it's not clear when the business will be profitable enough to pay market-level salaries. Remember, working for free for three months is one thing, but for two years is another."

Murthy was involved in a three-way partnership where one of the partners lost interest after an initial flurry of activity. It was a messy negotiation to reduce his share of ownership, and he ended up with more than he merited.

So it is better to have a formula based not only on the money invested, but also on their work and productivity. If you can afford it then it's best to have a lawyer draft the appropriate agreements.

Also consider that as time goes on the lives of the partners will change and there should be an exit clause on how a partner can leave. This needs to be very clear from the start - how to get out, buyout arrangement, agreements to sell, how to value the business, lock-in formulae (the minimum time each of the partners must stay with the company), etc.

One should be as clear as possible in drafting the contracts and all the legal documents. "Do not rely on the friendship - start the business as if you were total strangers or else you can strain or even destroy the friendship," says Delhi-based lawyer Rajiv Bansal.

He says that partnership is an agreement between two or more persons. It need not be in writing or registered and could even be oral. However, Section 69 of the Partnership Act defines clearly the consequences of non-registration.

"Before one sets out to constitute a partnership firm, one must be sure of the credibility, integrity, faithfulness of the person one intends to be partner with. The whole edifice of a partnership firm is based on mutual confidence. When friends enter into a business it is advised that they draft a partnership deed which clearly spells out the rights and duties of the partners," says Bansal.

Drafting a comprehensive partnership deed can minimise the possibility of the disputes. You should mention all key points and conditions you need to make in the business.

Before you get down to do business with your friend try to get a few things sorted out at the beginning:

1. Name of the firm

2. Business of the firm

3. Place where the business is to be carried on

4. The capital of the firm and details of contribution by the various partners

5. The share of partners in the profit and loss

6. Interest payable to a partner if loans are taken for partnership

7. Keep an account book of the firm

8. The withdrawals or drawings by a partner prior to the taking of accounts

9. Prepare the balance sheet and profit and loss account

10. Provision for dissolution

11. Disposal of the goodwill and assets of the partnership

12. Restrictions as to the carrying on a similar business within a certain locality after such dissolution

13. Dispute resolution mechanism in case of differences of opinion

Be a smart partner and follow the above guidance before getting too deep into the relationship and business. Expect nothing from your friends but friendship. But when it comes to business friendship, expect only business.

Note: This article is from Economic Times