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7 Things to Know Before Starting a Business With Your Family
7 Things to Know Before Starting a Business With Your Family
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Money Management

7 Things to Know Before Starting a Business With Your Family

Money254
Doris Kendi
March 24, 2022

If you have ever entered into business with a relative, how was your experience? Was it a dream come true, or was it an absolute nightmare? 

There are obviously many stories that support each point of view. Some people swear that going into business with family is a recipe for disaster. On the other hand, some people have a strong belief that the support that comes from running a business with family helps propel a business forward faster than other non-family-run counterparts. 

In fact, various studies done in recent years have found that family-controlled businesses tend to have higher financial performance across the board. 

However, as dream-like, as it sounds, a lot goes into running a successful business, and just being blood-related is not enough. So if you have an opportunity to start or join a family-owned business, here are seven key things to consider to see if moving forward is a good decision for you and everyone involved. 

Compensation: How Will Compensation Be Determined?

Well, the love between you and your family members, including your spouse, will not help you and them pay the bills. 

So if you are the principal person in the business, you need first to figure out how you are going to compensate everyone with a wage they actually survive on. Not a little stipend here and there. And worse still, do not create an ‘everyone helps themselves’ kind of a situation. 

This point is especially important for businesses that are still young and need your support before they can comfortably afford to cover all overheads. 

Also read: 8 Common Challenges Every Family-Owned Business Faces (and how to overcome)

Confidence: Formalise the business relationship in Writing

Many people assume that because you are working with family - especially a spouse - there is no need to have contracts or official documents that stipulate your working relationship. They assume that you will successfully sail through any kind of conflict because you are related. 

However, nothing could be further from the truth. If anything, things should be made even clearer because you are family. Ensure to have everything documented. Especially because you are family. 

From everyone's responsibilities, decision mandates, every detail pertaining to compensation, and even things as simple as vacation days. Put it all down on paper and ensure the involved parties sign it. 

Also read: Family Health: How to Financially Prepare for Medical Costs in Retirement. 

Leadership Structure?

It is also crucial to figure out the leadership structure early enough to avoid conflict. Define who will be the ultimate boss and run the show. 

In addition, define the role of each person in the business. While various family members may be qualified for similar tasks, duties should be divided up and clearly allocated to avoid conflict.

In some cases, big decisions can be made together. However, debating over each little move will only eat into business time or worse destroy precious relationships. Ultimately someone has to take the responsibility of making the finance decision. Depending on the size of the business, you could also have a leadership team that votes on major decisions. So do not leave anything to chance!

Involve an Independent Third Party to Iron Out Any Biases

While divergent ideas may not necessarily result in conflict, the emotional bonds between family members can make it difficult to make objective decisions. 

For example, family member A might be better suited to run a section already held by family member B. While it could benefit the company more for family member B to step down and allow family member A to take charge, they might feel that it is unfair and this might cause conflict between the members. 

So, having a neutral party that hasn’t been connected to you or your family members is very useful. The person can come in when needed and help speak sense into situations where relationship biases are blocking the way to a common ground. 

For a bigger business, the family can appoint a management team that is not part of the family or hire consultants whose recommendations are considered by the leadership team. Professionalisation of the family business is an important step in the growth process. 

Set Clear Boundaries

A common problem in a family business is overemphasising "family" and forgetting why you are in business. The traits of a thriving business may not always be compatible with family harmony, so be prepared to deal with any conflicts that emerge. But it helps to set clear boundaries beforehand. 

For example, someone might choose not to put in the work on their role because, after all, their direct boss is their husband or dad - an apparent conflict of interest. 

Mixing business, personal, and home life will eventually produce a volatile brew. Therefore setting clear boundaries beforehand and clearly communicating them can help you deal with such situations. 

Keep business and family/home relationships separate. Keep the business environment professional. Outside of the office, keep business discussions to a minimum. While this is not always possible, reserve them for an appropriate occasion — not a family wedding or funeral, for instance.

Treat Everyone Fairly

While some people might advise against hiring family members, they forget one of the main advantages of running a business with family - commitment and dedication. 

In fact, many successful businesses would never have survived without the sacrifices made by family members. Qualified family members can be a great asset to your company. 

But do not take advantage of that. Avoid favouritism in business. Ensure that criticism and praise pay scales, promotions, work schedules are handled the same way for both family and non-family members. Don’t set standards higher or lower for family members than for others.

Also read: How to Negotiate an Entry-level Job Salary 

Develop a Succession Plan

Last but not least, you need to develop a clear succession plan. 

You have probably seen stories about family businesses that have collapsed after degenerating into bitter rivalries and even court battles. 

Some businesses start having succession problems as soon as the principal member dies, while others begin earlier. 

So figure out the succession before it is too late. Do not wait until your loved ones start fighting each other over the business. 

WRAPPING UP

There are many successful family-run businesses out there today. But just like any other business, it takes a lot of planning and dedication from the members. 

So before going into business with family, ensure that you have everything figured out and have it on record. In addition, set out clear boundaries to separate business and personal relationships between the members and do not shy away from involving a third party if need be. 

Also, treat everyone fairly to avoid unnecessary conflicts. 

Doris is a finance professional, freelance writer and SEO expert. She has experience helping businesses of all sizes create content that helps improve their site quality and increase their online traffic. She is a personal finance and wealth creation enthusiast and a frequent contributor to Money254. You can find Doris on Linkedin.

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