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Family members start a major portion of new businesses launched in the U.S. every year. Brothers come to mind, of course, when it comes to family business.
Whatever the family ties, however, starting a business with a spouse, parents, siblings, children or other family members presents unique challenges over and above the usual problems a startup faces.
That’s why only one in three family businesses survives to the next generation.
In the startup stage, the dangers can be especially acute. Family members sometimes join the excitement of a startup business without a clear idea of their role once the business is underway. If family is involved in your startup venture, you should be clear up front about compensation, exit plans and other details before they become a problem.
We’ve given this a great deal of personal reflection and come up with 12 essentials for striking the right balance when starting a family business.
12 essentials for striking the right balance in a family business
- Set some boundaries. It’s easy for family members involved in a business to talk shop 24/7. But mixing business, personal and home life will eventually produce a volatile brew. Limit business discussions outside of the office. That’s not always possible, but at least save them for an appropriate time — not at a family wedding or funeral, for example.
- Establish clear and regular methods of communication. Problems and differences of opinion are inevitable. Maybe you see them already. Consider weekly meetings to assess progress, air any differences and resolve disputes.
- Divide roles and responsibilities. While various family members may be qualified for similar tasks, duties should be divvied up to avoid conflicts. Big decisions can be made together, but a debate over each little move will bog the family business down.
- Treat it like a business. A common pitfall in a family business is placing too much emphasis on “family” and not enough on “business.” The characteristics of a healthy business may not always be compatible with family harmony, so be ready to face those situations when they arise.
- Recognize the advantages of family ownership. Family-owned businesses offer unique benefits. One is access to human capital in the form of other family members. This can be a key to survival, as family members can provide low-cost or no-cost labor, or emergency loans. Firms run by trusted family members can also avoid special accounting systems, policy manuals and legal documents.
- Treat family members fairly. While some experts advise against hiring family members at all, that sacrifices one of the great benefits of a family business. Countless small companies would never have survived without the hard work and energy of dedicated family members. Qualified family members can be a great asset to your business. But avoid favoritism. Pay scales, promotions, work schedules, criticism and praise should be evenhanded between family and non-family employees. Don’t set standards higher or lower for family members than for others.
- Put business relationships in writing. It’s easy for family members to be drawn into a business startup without a plan for what they will get out of the business relationship. To avoid hard feelings or miscommunication, put something in writing that defines compensation, ownership shares, duties and other matters.
- Don’t provide “sympathy” jobs for family members. Avoid becoming the employer of last resort for your kids, cousins or other family members. Employment should be based on what skills or knowledge they can bring to the business.
- Draw clear management lines. Family members who often have a present or presumed future ownership stake in the business have a tendency to reprimand employees who don’t report to them. This leads to resentment by employees.
- Seek outside advice. The decision-making process for growing a family business can sometimes be too closed. Fresh ideas and creative thinking can get lost in the tangled web of family relationships. Seeking guidance from outside advisors who are not affiliated with any family members can be a good way to give the business a reality check.
- Develop a succession plan. A family business without a formal succession plan is asking for trouble. The plan should spell out the details of how and when the torch will be passed to a younger generation. It needs to be a financially sound plan for the business, as well as retiring family members. Outside professional advice to draw up a plan is essential.
- Require outside experience first. If your children will be joining the business, make sure they get at least three to five years business experience elsewhere first. Preferably in an unrelated industry. This will give them valuable perspective on how the business world works outside of a family setting.
Our bottom line
It’s hard enough launching a company without the added pitfalls and potential baggage of family relationships. But family businesses have some great advantages over others — mainly a dedicated pool of people ready to stand behind your effort. If your startup is a family business, you’ll need to take extra steps to avoid burnout, ensure on-the-job harmony and attract advice from business experts outside the family circle.
Originally published in August 2019.