Entrepreneurial family members are fueling the continued surge of small business startups we’re seeing this year, following a record number of business starts in 2023. Not only do family members start a major portion of new businesses in the United States, but family-owned businesses account for 64% of America’s gross domestic product and more than 70% of global GDP.
Even small family businesses make a big impact: They generate 62% of the country’s employment and account for 78% of all new job creation, studies show. And some family businesses grow to be huge, of course: About 35% of Fortune 500 companies are family-controlled.
When it comes to the “who” of a family business, brothers naturally come to mind for us. But whatever the family ties, 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.
How to Succeed in a Family Business — and Enjoy ‘Succession’
In the startup stage of family owned companies, the dangers can be especially acute. Relatives 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.
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12 essentials for striking the right balance in a family business
1. 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.
2. 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.
3. Divide roles and responsibilities.
While various relatives 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.
4. 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.
5. 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. Family businesses run by trusted relatives can also avoid special accounting systems, policy manuals and legal documents.
6. Treat family members fairly.
While some experts advise against hiring relatives at all, that sacrifices one of the great benefits of a family business. Countless small family owned 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.
7. 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.
8. Don’t provide ‘sympathy’ jobs for family members.
Avoid becoming the employer of last resort for your kids, cousins or other relatives. Employment in family businesses should be based on what skills or knowledge they can bring to the business.
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9. Draw clear management lines.
Family members who often have a present or presumed future ownership stake in family businesses have a tendency to reprimand employees who don’t report to them. This leads to resentment by employees.
10. 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.
11. 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 professional advice to draw up a plan for the next generation is essential for many family businesses.
12. 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.
Shattering Myths: Tips to Successfully Launch and Run a Family Business
Running a successful family business can be both rewarding and challenging. There are 12 keys to family business success, including clear communication, a shared vision, and a strong sense of family values. Family businesses have the advantage of a shared history and a sense of trust that can help them navigate difficult situations.
However, it’s important for family business owners to set clear boundaries between work and family life to avoid conflicts and ensure the business’s success. With the right approach and mindset, family businesses can thrive and provide a source of pride and financial security for generations to come.
Our bottom line
It’s hard enough launching a company without the added pitfalls and potential baggage of family relationships. But family owned 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.
