Not to be a dick, but just man/woman up. Tell him/her that sorry, I just don't think we'd make good partners right now and (if true) I'd rather preserve our friendship. If it is true tell them the friendship is more important then a business that may or may not make it, and frankly you don't think the two of you would make a successful business together right now.

If they don't grasp that they are a pretty fair weather friend to begin with so don't loose sleep and get your business moving.