Starting a Family Business

If you and your spouse are thinking about starting up a website together; or if you and your grown children are wanting to work together to buy and manage real estate; or, in fact, if you want to involve your family or close friends in any business venture; know that family owned businesses can have special problems. If they aren’t addressed, you stand to ruin family relationships in addition to suffering business losses.

Here are tips on things to consider when starting a family business.

Know your family.

Every family has it’s own quirks and personalities, and even their own definition of who is included in family! Analyze yours to make sure that the needed talents are there (or can be developed) and that you (the founder) think that the family relationships can survive a business together.

Plan it out together.

Plan out who has what ownership interests. Before you start the business, get help from an objective third party as to how much ownership in the business each family participant will have – based on measurable qualities such as amounts invested paired with work efforts involved.

Plan roles and responsibilities of each involved person, including family members. Go so far as to write down their daily duties in a job description as well as assign a formal title to the role – just as you would for the role if not filled by a family member or close friend.

Plan out what the communication channels will be, both in your business and in your family. How will you keep all employees (related or not) informed? How will you work out differences? What will you do if a family member goes around defined work reporting channels and uses family relationships to decide who to tell what? How will you keep non-involved family members up to speed on the business and how will you give interested party family members a way to provide input to the business mission?

Plan for succession needs. Set up family member entry rules. Will any family member be able to work in the business or do they have to prove themselves somehow – such as working in a similar role in a non-family business for a certain number of years. Know that timing is important in getting succession right – the founder must be able and willing to relinquish control and the successor must be prepared, able and willing to take the responsibility of the role and advice of the founder. Founder’s should be aware that successors may morph the company into a new mission after they take over – either due to their own interests and talents or due to economic and market necessity.

Make it legal.

Document your plans and make a legal agreement between you and participating family members, spelling out everyone is agreeing to and specifying what will happen if one of them wants to leave the business.

Stay on top of communications.

Set up formal procedures to make sure communication lines stay open – for both involved family members and investing family members. Make sure there are channels to hear about and handle perceived favoritism between family member employees and non-family member employees. Meet frequently to make sure that differences are discussed and resolved and work progress is reported.

Don’t let family dynamics or family issues get in the way of business communication.

Care for all employees.

Don’t let favoritism creep into the business. Treat family/non-family with equal fairness in all ways; including pay, promotions, opportunities, praise, and punishment

Watch to make sure that the person with the right skill set is in the right position.

Care for family relationships.

Family relationships can be fragile. To maintain them make sure family members get time away (from business and family activities) to interact with other people. Foster the maintenance of good work/family time balance – don’t use family time to discuss business issues. Use objective 3rd parties to mediate work and family issues when needed

Define and formalize the family expectations of the business. A family business represents the family to the world, so even members who are not involved financially or time-wise may have ideas about what a business someone in their family is running may or may not do. Provide a channel to funnel those ideas fairly to avoid issues.

One mechanism to do that might be to develop a family charter. Success Care defines a Family Charter as

“a decision-making tool that sets out the values that are important to the family and the rules for resolving problems in a united and peaceful way. It is not intended to be a legal document (as is a Shareholders’ Agreement), but a reference point that clearly sets out the criteria for the goals, management philosophy, share ownership, working relationships, family relationships, and succession of the family business.”

Once you have a charter you could elect a family council to (among other things) guide the business from family perspective. Family councils for the family business are similar to an outside board of directors.

Care for the business.

Hire an outside board or mediator to watch for and help with family issues interfering with business concerns.

Have a formal business mission, values, goals, procedures, strategies in place to operate, grow and pass business to next CEO. Make sure the operational plan includes what to do if there is a family wide emergency, or illness or vacation.

So, don’t slack off when setting up a family business – take the business part seriously and realize that you have special challenges with which to deal!

Sources:

Score Princeton Blog http://scoreprinceton.blogspot.com/2009/07/what-are-special-considerations-for.html

Frugal Entrepreneur  http://frugalentrepreneur.com/2011/11/the-frugal-family-business-guide-part-1-its-all-in-the-planning/

Dynamic Business http://www.dynamicbusiness.com.au/legal/how-to-avoid-family-run-business-drama-14052012.html