Like a Virgin: Secrets They Won't Teach You at Business School

Q: What do you do if you have a 50/50 business partnership with a friend, but, after ten years, it no longer works? I don’t want to ruin this friendship, but the business is suffering tremendously. He still expects his 50 per cent share. From experience I know that he is not going to improve. What would your view and solution be?

—P., Australia

A: Sadly this is a common and sensitive situation and I frequently receive questions about it. Friends often set up businesses together, and initially their camaraderie and trust serve them well. However, as the business grows larger and gets more complicated, such bonds are easily strained, and yet the constraints of friendship may prevent the founders from confronting the problem and taking decisive action.

Handled properly, there is no need for this situation to damage a business or friendship. When I confronted a similar situation in 1980, the recession in Britain was having a negative impact on Virgin Music. As sales dropped and the economic outlook worsened, our forecasts showed that the company was going to lose one million pounds that year. Tensions ran high and my relationship with my best pal and partner, Nik Powell, was being damaged.

Nik was one of the co-founders of Virgin Records, and along with my cousin Simon Draper and myself, had been crucial to its early success. But as our financial situation forced us to make tough decisions, we found that we were increasingly at odds over strategy.

Nik wanted to consolidate the business, while Simon-who as managing director ran the label-wanted to expand our way out of our troubles and sign a couple of new acts. Two prospects interested him: Phil Collins and the Human League.

I had added to our difficulties by unilaterally deciding to buy two nightclubs. I felt that the deals were just too good to turn down, even if they added to our already mounting debts.

While Nik ran our record stores well and had produced the cash we needed to expand our music label, I realised that we were not going to get ourselves out of the hole just by increasing the profit margin on sales in our record stores. We needed to do something drastic. We needed to find another breakthrough act.

With the business stuttering and the management team at odds, I had to choose between the two approaches and decided to go with Simon’s. It was a tough call, but it was the right one, even though it meant that we had to dissolve our partnership with Nik.

Once I had made the choice, we moved ahead quickly. I borrowed the money to buy out Nik and he took with him a couple of the businesses he loved-our film business, for one. When everything was settled, we held our ‘divorce party’ at one of the new clubs.

Since then, I have done business with my friends in other situations, and, looking back over forty years, the lessons are clear. There is nothing wrong with doing business with your friends-in fact, I encourage it. It’s important to create an atmosphere where friends can work together and where friendships flourish. We all spend so much of our adult lives at work, so let’s enjoy it.

The big caveat that has to go with this, however, is the necessity to deal quickly with any problems. The fact that your partner is also a friend cannot be an excuse for turning a blind eye.

In your situation, P., you need to confront the issue head-on. You should be honest with your partner about his shortcomings and their consequences, or else these problems will fester. Employees who pick up on the tension may take sides; rivalries may develop. If this happens, your personal relationship-and also perhaps your business-could deteriorate beyond repair.

If the issue is dealt with quickly, honestly and openly, you will clarify for yourself and your employees where the business is heading and why. Once you have made the decision to dissolve your partnership, try to be generous in your convictions-buy him out if you can. If you work out an amicable settlement and provide your partner with a dignified exit, you will then be able to work on your friendship and mend bridges in the years to come.