An essential checklist for setting up a family business
In a new Business Advice series explaining the mechanics of running a family business, Grid Law founder David Walker outlines the early considerations that must be taken before going into business with relatives.
Working together in a family business is a dream for many people. The trouble is, that dream can easily turn into a nightmare when problems in the business cross over into family life.
So, how do you prevent this from happening?
To start with, just because you want to be in business together, it doesn’t mean that you should be. Being in any business can be very rewarding but there’s no doubt it brings its own difficulties and stresses too. These can multiply if, for example, you don’t have the right skills or experience between you, or you have different ambitions for the business.
So, if you are thinking of starting a family business, here are a few things for you to consider. If you’re already running one and you haven’t thought about these issues, now is a good time to do so.
But remember, there are no rights or wrongs here. You just have to accept that unless all of your business and family goals are aligned, working together may not be the best plan for your family.
A shared vision
A great place to start is to consider your vision and ambition. Ask yourselves why you want to be in business as a family? Is it to spend more time together, or do you want to build an empire to support generations to come? If you’re not all aiming for the same thing, then chances are one or more of you will end up disappointed.
Next, think about ownership and control. You may be starting as a family business, with only family members owning and running it, but will it always stay that way?
As the business grows, will you open it up to non-family members? This may be inevitable if you don’t have family members with the right skills to fill the roles. If you want it to remain a family business, how far out do you extend it? Cousins, aunts, and uncles may be included, but what about non-blood line family members such as in-laws?
If you do have other, non-family members on the board, you have to remember to fully include them in the decision making of the company. Now, this may seem obvious, but how many meetings or discussions are held round the dinner table rather than in the board room?
Whilst ownership and control may stay within the family, most family businesses will have non-family member employees. This is fine, and as with any other business, you simply recruit the best person you can find for the job.
But what do you do when a family member wants a job? Is there an expectation that you will always be able to find a job for any family member who wants to work for you?
This is one of the areas where I see the most problems. A family member is given a job, but they’re not the best person for it. This causes resentment from other non-family member employees who have to work with them, and often feel they’re working doubly hard to make up for the family member’s failings.
When it comes to performance reviews and salaries the problems get even worse.
If a family member isn’t performing as well as a non-family member employee, but is given the same (or sometimes a greater) salary, you can soon find bitterness creeping in. Then, the performance of the non-family member employees drops off too and the business suffers all round.
To avoid this, you could make it a requirement that a family member must be suitably qualified, or even experienced by working in another business first. If you have set this expectation right from the start, it shouldn’t be an issue for the family member, and it will avoid problems with the other staff members too.
If a spouse of a family member is involved in the business, what happens if the couple separate? They may both be very good at their jobs and making valuable contributions, but continuing to work together may be intolerable. Should there be an obligation for the non-family member to step down? If there is, how do you ensure this is done fairly so that this doesn’t cause even more problems?
What about the next generation?
Are you building this business with a view to future generations taking it over, or will it be sold at some point? What if future generations don’t want to continue the business? At that point do you consider selling it?
Remember, a business must be saleable to get the best price for it. If it’s too dependent on a core group of family members, it may not be the most attractive business to a potential purchaser.
Running a family business is, in many ways, no different to running any other business. However, as a director of a business, you have to remember that you’re under a legal duty to act in the best interests of the company. But as a family member, you also have a loyalty to other family members and naturally you will want to do what’s best for them.