Starting a Business with a Friend and No Written Agreement? A Real-Life Cautionary Tale

“We were so close that we thought a written agreement would ruin the friendship. Now I’ve lost the business and a friend of nearly twenty years.”

The person who said that is Charlie Chang, 46, who immigrated to Canada in 2005. He runs a Chinese restaurant in Toronto. Three years ago, he and a childhood friend opened the place together. They put in roughly the same amount of money—one handled the kitchen, the other ran the front of house. Business was good. When I stopped by his restaurant last month, the name had changed and so had the staff. I asked what happened. His partner had pulled out, and they were in the middle of a lawsuit.

Charlie’s story isn’t unusual in the North American Chinese entrepreneur community.

From Childhood Friends to Adversaries, All Because of a “Verbal Agreement”

Charlie and his partner, Lee, grew up together. After immigrating to Canada, they went their separate ways for a while, then decided to open a restaurant. Their thinking was simple: they’d known each other their whole lives, they trusted each other. Why bother with a written agreement? A verbal understanding was enough.

“We agreed that we’d split the profits 50-50, and whoever worked harder would get a little extra,” Charlie recalled. “We didn’t go into detail about who was responsible for what. Lee liked spending time in the kitchen working on recipes, so I handled front-of-house stuff—hiring, ordering supplies, dealing with customers.”

The first year was fine. Both were motivated, and business was picking up. But problems started to creep in.

First, the workload became uneven. Charlie was working from morning to night—answering calls, handling complaints, negotiating with suppliers, managing staff schedules. Lee, aside from cooking, didn’t touch much else. Over time, Charlie started feeling resentful.

Then there was the bookkeeping. They used a point-of-sale system Lee had recommended. Charlie wasn’t comfortable with it and relied on Lee to send him screenshots of the numbers. A few times Charlie noticed the cost of ingredients seemed off. When he asked Lee about it, Lee said, “The supplier raised prices.” Charlie didn’t push it—he trusted him.

The real blowup came in year three. Charlie accidentally discovered that one of their suppliers was Lee’s relative. The prices they were being charged were nearly 20 percent above market. On top of that, Lee had quietly raised his own salary twice without ever mentioning it to Charlie.

“I went to talk to him, and he said, ‘I’m running the kitchen. I deserve to take a little more. You have no idea how hard it is back there.’ I said, ‘Fine, but you should’ve told me.’ He said, ‘We had a verbal agreement. What’s there to talk about?’”

They argued for a month. Finally, Lee said he wanted out. He demanded that Charlie buy his shares at whatever the current valuation was. Charlie thought the valuation was too high. Lee thought Charlie was lowballing him. The dispute ended up in small claims court, and the restaurant’s business went downhill fast.

“Legal fees alone cost me nearly 20,000 Canadian dollars. We had to shut down for a month. Lost half our regular customers.” Charlie sighed. “Looking back, if I’d spent a few hundred dollars on a partnership agreement and put all this in writing, we would never have ended up here.”

Three Hidden Bombs in a Verbal Agreement

The three issues that blew up Charlie’s partnership are the same ones that show up again and again in verbal partnerships.

Bomb #1: Roles and contributions weren’t defined
How do you divide the work? If one partner does more, how is that compensated—through a salary, or through a different profit split? What happens if one partner stops pulling their weight?

Without clear answers, resentment builds. Charlie felt Lee only cooked and ignored everything else. Lee felt cooking was the heart of the business. Who was right? With no written agreement, nobody could say.

Bomb #2: Decision-making was a gray area
Who makes the final call? Are major decisions made by majority vote, or by ownership percentage? What happens when partners disagree?

When Lee raised his own salary and hired a supplier who was a relative, he saw it as his right as kitchen manager. Charlie saw it as a breach of trust. Without a written agreement, there was no way to resolve it.

Bomb #3: There was no exit plan
What happens if a partner wants to leave? How is their share valued? Who can buy it? How is the payment structured?

The biggest fight between Charlie and Lee was over valuation. Lee said, “The business is worth $500,000. I own half. Give me $250,000.” Charlie said, “Cash flow is tight. It’s worth $300,000 at most.” With no agreed valuation method, the argument went to court.

What a Good Partnership Agreement Should Cover

If you’re thinking about starting a business with a friend—or you’re already in one without a written agreement—here are the essential elements you need to put in writing.

1. Ownership and contributions
How much is each partner contributing? Cash? Equipment? Sweat equity? If one partner is contributing expertise instead of cash, how is that valued?

2. Profit distribution
How are profits shared? Straight by ownership percentage? Or do partners take a salary first, then split the rest? If one partner works full-time and another part-time, does the split reflect that?

3. Roles and responsibilities
Who does what? Who manages money? Who handles operations? What happens if one partner fails to meet their responsibilities?

4. Decision-making rules
Which decisions require unanimous consent (like selling the business, raising capital, hiring a CEO)? Which decisions can be made individually (like hiring an entry-level employee)? Does voting power follow ownership or is it per partner?

5. Exit strategy
How can a partner leave? Who can buy their shares? How is the price determined—by an independent valuation, or by a formula like three times the previous year’s profit? Is payment made in a lump sum or installments?

6. What happens if a partner dies, becomes disabled, or divorces
If a partner gets divorced, does their ex-spouse automatically get a share of the business? If a partner dies unexpectedly, do their heirs inherit the shares, or does the business buy them back? (Many partnerships fund buybacks with life insurance.)

7. Intellectual property ownership
If your business creates technology, recipes, or creative work, who owns what? If a partner leaves, can they use that intellectual property for their next venture?

Does a Written Agreement Really Damage the Friendship?

A lot of people avoid partnership agreements because they think talking about money and “what-ifs” feels awkward—like it signals a lack of trust. But Charlie’s experience shows that the real damage happens when there’s no agreement at all.

A business partnership is a commercial relationship. Strong commercial relationships aren’t built on trust alone. They’re built on clear expectations. Putting those expectations in writing isn’t a sign of distrust. It’s a sign of respect.

“I don’t even talk to Lee anymore,” Charlie said quietly. “Almost twenty years of friendship, gone. All because we didn’t put a few pages in writing. Was it worth it?”