When we hear family business we think of the mom and pop store, but it’s actually defined as any business in which two or more family members have the majority of the ownership and decision power.
This type of establishment is rarely given the recognition it deserves. Family owned businesses make up 90% of all U.S. businesses, employ 60% of the workforce and account for 64% of the gross domestic product.
Unfortunately, because of the unique challenges of working with family members, only 30% of them make it to the second generation and 12% to the third.
The dangers can be especially acute in the early stages. You might be excited to join forces with your siblings, parents or spouse but you need to have a clear idea of your roles, be upfront about your expectations and keep a few essential rules in mind.
Establish Everything in Writing
When starting a business with family members, it might be tempting to base everything on trust and not set clear boundaries like you would with regular employees or associates. But, as with any workplace, emotions can interfere.
When you pair that with the fact that every family has its conflicts, you can see the importance of having some key aspects set in writing from the get-go. Things like company policy, duties, ownership shares and compensation should be clearly defined, as to avoid any hard feeling or miscommunication.
You should also consider having regular meetings at work instead of talking shop at home. It’s better to discuss all problems and make decisions when everyone is present, otherwise you risk having the whole extended family weighing in on what you should do.
Have a Solid Business Plan
Strategic planning is even more important for family-owned businesses than other types of enterprises because, in most cases, families put forth a large portion of their assets. A lot of conflict can arise from the disparity between business and family goals and the best thing you can do to ensure the success and longevity of your operation is to align those goals and exchange views on how to reach them.
The ideal is to come up with a strategy that provides the ability to balance out both family and business interests so that everyone is satisfied.
Consider Getting a Loan
Setting up a business with family members has some distinctive advantages. One is that you have more options when it comes to financing. You could get a small business loan but you can also get some extra capital from relatives. Either way, its wise to have a formal agreement and respect your terms just as you would if you had borrowed money from a bank. Best practice is to keep them informed on how the company is doing and to respect the terms of your agreement.
In the end, you want to be prosperous but you also want to keep getting invited to family reunions and maintain the same close and respectful relationship with your loved ones.
Know Where to Draw the Line
Although you’ll probably read a lot of advice on how you shouldn’t hire any family members, many small companies would have never stayed afloat without the hard work of such dedicated employees. Be that as it may, you should avoid favoritism. Promotions and financial incentives should be distributed equally among the entire staff. Although qualified family members can be a great asset to your business success, setting standards lower for them can backfire when dealing with the rest of your personnel.
Working with your family can be very rewarding, but you need to know where to draw the line and treat them like just as you would any other colleague. If someone keeps skipping work or doesn’t take the job seriously, you have to discourage this kind of behavior.
It’s also preferable to steer clear of giving “sympathy” jobs to family members. Your company shouldn’t become a last resort for your kids or their cousins. Choose employees based on their skillset and the expertise they can bring to the business.
Hire an Experienced Consultant
Getting advice or guidance from an outside source can give you an invaluable reality-check. A consultant is not enmeshed in any of the passionate squabbles that are not uncommon to families and will stay professional and clear-headed even when you’re struggling.
The ability of an experienced consultant to provide fresh ideas and original thinking won’t be lost in the tangled web of familial ties. They will also have worked with many other firms such as your own and will be able to assist you in matters you are less knowledgeable about such as insurance, accounting, legal obstacles or financial opportunities.
Plan for the Future
Another issue in which you can benefit from the help of a consultant is developing a solid succession plan. Without it you’re practically asking for trouble. There are many factors that contribute to the low rate with which small family businesses manage to pass on to the next generation. It may be because the operation was no longer viable, the kids wanted to pursue a different career or the new management was not prepared to take on their role. Lack of planning is by far the biggest underlying problem.
Some owners have their sense of identity heavily tied into their small company and are hesitant to start thinking about what will happen when they have to pass the torch. They may feel that their successors and not ready to take their place.
Carefully planning the succession process in due time is crucial to saving you business. You don’t want to delay it to the point where you have to act in a hurry because of unfortunate circumstances.
You can start by seeking out potential inheritors, introducing them into the company and guiding them through different work-related tasks that require higher and higher levels of responsibility.
This way you’ll be handing over the reins gradually and they have time to learn the requirements for holding the same position as you.
When you’re both ready, you can start making the financial arrangements necessary for you to be able to retire. The earlier you do this, the more time your successors will have to accommodate themselves while still being able to count on you for guidance during difficult business decisions.
Interesting related article: “What is a Business Plan?“