When you grew up in a household that turns ideas into profit, you’ll believe that your family makes great business partners. After all, you brainstorm together, and great minds think alike.
If your family already owns a successful business, the addition of your name to the board will unlikely result in significant changes — unless you amend the management style. But if you’re still in the planning stage, you might need to pause and consider whether your family is the right partner.
There are several reasons your family might not make good business partners. For example, your spouse is a brilliant strategist, and you’re a risk-taker. If you tell them to jump, they may respond with complicated calculations on how fast they’d fall and whatnot, causing impatience on your part.
That said, here are some considerations to make before starting or joining a family business:
1. The Statistics and What Experts Say
Start by researching what the experts think of family-owned businesses. You don’t have to base your decision on their opinion, but knowing it nonetheless will help.
If you’re feeling confident about a family business, Joachim Schwass, director of the Global Family Business Center at the International Institute for Management Development (IMD) in Switzerland, may boost your positive outlook. Schwass believes that family-owned businesses have better incentives in terms of prudent management since the family members share a goal of passing on a healthy business to the future generation. He cited numerous studies that show family businesses produce more wealth and perform better than publicly-owned corporations.
True enough, some known mega corporations are family-owned, such as Samsung Electronics, Volkswagen, and Walmart.
On the contrary, family businesses may also fall short on meritocracy, given that the key positions are only held by the family members. John Van Reenen, unit director at the London School of Economics, believes such. He adds that a family business’s next generation of leaders may lack the drive to excel since they’d gain a prominent position in the company anyway. Hence, many family businesses go downhill over time.
And indeed, 70% of family-owned businesses fail, as per Harvard Business Review.
Therefore, consider if you and your family share a common goal and if you’re all highly motivated to propel the business to success. Your goals and level of motivation will determine whether you can take after the family-owned mega-corporations, or after the 70% that have failed.
2. The Contributions and Roles of Each Family Member
Your relationship with each other may affect how you’d assign roles. But this may cloud your judgment, causing you to overestimate how well-suited a particular family member is.
Adopt an unbiased perspective as you decide on each other’s roles and contributions. Consider your family members’ credentials and level of commitment. Outline your expectations from one another. You may write a job description, complete with qualifications and requirements. That way, you’ll immediately find out how committed your family members are to the business.
Dividing your duties will avoid conflicts, and help you make a major decision rationally. If all members share a role, your opinions and judgments may clash during important meetings.
3. Financial Matters
Decide on the equity stake of each family member, how much, and how soon you’d give it. John Davis, faculty chair of Harvard Business School’s Families in Business Program, recommends giving your partners an interest in the business in five years or so, instead of all at once. It may be easy to downplay financial matters with your family, but making your terms clear in a signed shareholder agreement will avoid disputes in the future.
4. Legal Aspects
Hiring a legal counsel will help you understand all the processes and goals necessary to form your family business. Your lawyer will advise you on how to run the business in certain situations, and on the things that you need to avoid an impasse. They will also help you prepare the legal business documents required in the article of organization, which assists in making your family business legitimate.
The legal aspects of a family business also involve creating guidelines and rules for everyone. For example, the day-offs of each partner, or their ability to work on another job. These guidelines and rules will also help you determine if your family members will respect your boundaries, restrictions, and expectations.
5. A Succession Plan
A family business without a succession plan will turn into shambles. So if you are committed to keeping the business alive and led by your kin, develop a plan on when and how to pass the torch to the next generation. Consider the financial and legal implications of your succession plan. The retiring family members should still benefit from the business, even after their reign.
Even if your family business is just a small enterprise, it doesn’t mean that you can downplay your roles and expectations. It may become your kin’s most prized heirloom, so don’t take it for granted and assume being a part of a family gives you a free pass for not doing your best.