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Starting and Joining a Family Business- The Advantages and Challenges

May 20, 2010 by Frank Goley, Business Consultant

Family Business account for over 80% of all US businesses, contribute 50% of our Gross National Product and provide half our workforce.  However only about 10% of family businesses make it to the third generation due to the unique challenges family companies encounter. 

Starting a Venture with your Family…

There are certain advantages to starting a family venture:

ü  Initial costs and losses are easily shared.

ü  Later success benefits the family as a whole.

ü  Enables the family to be together.

ü  Family may trust each other more than outsiders. 

However, there are many challenges which come up during a start-up venture that need to be addressed:

Ø  Tips for Spouses jointly running and starting a business:

ü  Follow business rules; romance is for non-business hours.

ü  Clearly define each spouse’s role.

ü  Accentuate each other’s talents.

ü  Keep business and personal life separate- understand the inherent conflicts of interest.

ü  Set strong ground rules and understand you won’t always agree.

ü  Define your expectations specifically and clearly.

ü  Set aside family time.

ü  Involve young family members in the business for fun, short tasks and jobs.

ü  Have a system for recognizing and rewarding hard work and accomplishments of family members.

Ø  Understand clearly what the business relationships of Family Members are.

Ø  Have a solid Business Plan which clearly defines the company structure, responsibilities, roles, strategic direction and so forth.

Ø  Clearly identify who is the lead entrepreneur.

Ø  Identify the strengths and weaknesses of each family member.

Ø  Understand each family member’s business experience and background.

Ø  Establish how much money each family member will contribute.

Ø  Agree up front how equity will be divided.

Ø  Honest and clear communication between family members.

Ø  Professional, business environment and structure.

Ø  How and where non-family will be incorporated into the venture. 

If You Join an Early Stage Family Venture…

Advantages for family members joining a new family venture are numerous:

ü  Family can help and are inexpensive during the development period.

ü  Family wants the opportunity to help the business as it benefits the family as a whole.

ü  Flexible hours, days and pay are attractive to family member initially, using minimum resources.

ü  The business brings family back together.

ü  Family members join the family venture because they are frustrated with their current work place and environment.

Issues to consider for an early stage family Venture:

Ø  Largely interpersonal issues.  Experience role reversals.

Ø  Resentment can build if a family member isn’t adequately challenged and rewarded.

Ø  Issues concerning power, rivalry and jealousy are common between family members.

Ø  Take in consideration a family member’s personal interest, skills, experience and training when assigning areas of responsibility.

Ø  Define, exactly, each family member’s area of responsibility.

Ø  Define who each family member is accountable to, as well as, for.

Ø  Determine compensation structures- salary, bonus and equity stakes.

Ø  How will a disagreement be handled?

Ø  What will be done if a family is not contributing?

Ø  If a family member wants out, what is the buyout plan and continuation plan?

Ø  Are you going to allow family members to be non-participating, passive investors in the business?

Best Advice:  Defining upfront the various rules, expectations and structure unique to a family business is vital for its success.  These unique requirements need to be well developed and delineated in the Company Business Plan and continually discussed in periodic family meetings.  This way, every family member feels they are vital and contributing to the overall strategic direction and future of the family venture.

Joining a Family Company As a Mature Business…

This can be the biggest challenge for a family member:  Where do I fit in a Family Business which has been in operation for a period of time and/or for successive generations? 

Some characteristics and challenges to consider for a later stage/ mature family business:

Ø  Having a policy that everyone starts at the bottom and works his or her way up through the ranks no matter their experience level, can initially set back family members joining the existing enterprise.  However, they will soon realize it is very important not to show favoritism between family members and non-family employees.  This nips in the bud issues of favoritism, entitlement, jealousy and resentment.

Ø  Family members can sometimes be transient, interim or temporary employees to help during seasonal demand, a particularly tough business environment or during high growth periods.  This phenomenon can increase spirit de corps, but it can also cause strife.  Again, having family meetings to decide such matters and ensuring the majority is on board with bringing in temporary family help, is critically important. 

Ø  Some family members may use the business as a stepping stone on a career path or starting their own venture.  Planning for this potential loss and contingency should be part of every family business’s Management Plan.  Also, establishing non-compete rules upfront and protecting the proprietary nature of the business if a family member moves on should also be part of the Company’s Planning Structure.

Ø  The issue of the family successor is huge in a mature family enterprise.  How will a family business choose its next successor?  Is there room for the next generation?  What are the expansion options for family members?  Is the Company growing enough to support new family blood?  Does the current management structure and style permit the flexibility and latitude the next generation seeks?  This all speaks to the importance of having well developed; family- contributed Business Planning in order to maintain successive-success for future generations.  This phenomenon becomes more urgent and important in maturing family operations.  We deal with this future outlook issue in subsequent section in detail, along with conflicts, limitations and issues faced by a family enterprise.

Advantages a mature stage family business enjoys are numerous, but the following are common, and often, keys to success: 

ü  Each family member is contributing to the overall benefit of the entire family.

ü  Family members can enjoy making and reaching goals together

ü  Be a member of a very special team which is very close knit.

ü  Everyone pitches in to do the hard work- getting things done, that “need doing”.

ü  Family teamwork translates into identifiable and quantifiable progress.

ü  A feeling among family that is “our business”.  It is “what we do”.  It is all about ownership and legacy.

ü  Special attitude shared by family members pushes them to work hard for the success of the business.

ü  Bringing in new life, new skills and added experience into the maturing business.

ü  Mature family companies often have and keep market advantage and competitive edge as new generations often ensure the company doesn’t stagnate.

Posted in Business Leadership, Business Management.

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