Running a successful business can be stressful and challenging, but running a family business means adding a new level of challenge. Working with your mother, brother, husband or wife may seem like an easy thing to do every day, but what happens when things go wrong?
Whenever we hear about a successful family business we create this mental image of a smiling family that is having a great day, chatting with their employees and worrying less because the family is right there next to them, for better or for worse. This all sounds wonderful and motivating, but we are here to tell you the good and bad sides of this type of business venture.
The majority of SME’s are run by one or more family members. Most family-run SME’s start small, but we are witnesses of many who have grown into real business empires.
Do you think you have what it takes to get involved with a family partnership? Whether you are starting this joint venture with family members or friends, here is what you need to know before setting up a family business of your own.
Advantages Of Family Business
As in any business, the family-run business too has a number of positive and negative sides. The positive aspects can be summarised in:
- Long-term stability – Stability in a family business can be achieved in many ways. The two most vital are leadership and long-term thinking for future generations. Although everyone has a role in a family-owned company, many of them have a business leader who will most likely stay in the same position until death. This long-term leadership is what ensures stability within a family-owned business.
- Loyalty – Loyalty and trust are the foundation of a successful family business. You already know these people very well, so it should be easier to be open about the expectations of the business from the outset.
- Commitment to succeed – The success of a family business means that everyone benefits financially, so it is in everyone’s best interest to commit themselves to a common goal.
- Respect for family values – When entering into a family business you are doing so with the same values, so you are not having to remind or teach someone else what your business values are.
- Greater willingness to sacrifice business – Family business owners are far more enthusiastic about fulfilling their responsibilities and have a greater opportunity to raise more financial capital than employees of other companies. The disadvantage of these businesses is that the owners of the family business cannot objectively see the pros and cons of the business, due to the very nature of this type of business.
Disadvantages Of Working With Family And Friends
The family business, in addition to having a number of advantages, also brings with it a number of risks and disadvantages. The following risks are of exceptional importance and special attention should be paid to deal with them as well as develop techniques for their management.
- Business decisions may be influenced by personal relations and result in a wrong decision for the business.
- Family members may start with the same goals and ideas, but in time this may change and they may start wanting different things. An example of this is if one family member wants to build a legacy, and others want bigger profit and decide to sell the business so they can retire early.
- Separating work from personal relationships. When working with family members, especially a spouse, disagreements at work can have a highly negative effect on relationships.
So, before getting involved in a family business ask yourself if you are able to deal with these kinds of situations? Are you ready to take the risks? Having a clear goal, mutual support and enjoying the ride are vital for success. If a problem or a disagreement arises, it’s important to respect family values and prevent any situations that may disrupt family relationships. To avoid unpleasant situations with family, you should sign formal agreements.
Getting The Right Legal Documents In Place
Whether you have started this journey with a friend or a family member, you need to have the right legal documents in place from the outset. Lots of people overlook this when working with family and friends because the trust is already there. However, things can and do go wrong, and if there’s nothing formal in place to protect the parties then things can very quickly turn sour. We have seen many family businesses fall into crisis because of a lack of formal agreements, contracts and everything in between.
Here are two of the most important agreements to have before setting up or joining a business with family and friends.
Partnership Agreements
In a business partnership, you are running the business as a self-employed individual. However, all the partners share responsibility for the business. Drawing out a partnership agreement shouldn’t come as a surprise to any of the family business partners. This agreement doesn’t have to be as formal as other company agreements. Explaining the expectations and nature of the business relationship with consideration for what will happen should things go wrong. Such an agreement can include:
- Each partner’s contributions
- Authority and decision making powers
- Divisions of profits and loses
- Purpose of the partnership business
- Get out clauses if things go wrong and what happens upon the death of a partner
Whilst having a partnership agreement is the best form of protection there is also legislation which governs this type of business formation.
“Without a partnership agreement, the rules of the relationship are governed automatically by the Partnership Act 1890.”
Shareholder Agreements
A shareholder agreement is an important agreement in an incorporated business with multiple owners. Everyone involved can benefit from it. This agreement will ensure that all family members know their rights and obligations within the company. It will also outline the management, privileges and protections of all those involved. You can even make your children shareholders in your limited company. Therefore they become legal owners of the company.
The main provisions of such an agreement include the following:
- Voting rights
- Board of directors
- Leadership structure
- Transfer and selling of shares
- Transferring management
- Transferring ownership
- Establishing a timetable for succession
- Financial disclosure
Most Famous Family Businesses Today
- Walmart – a retail chain of one of the richest families in the United States founded in 1945.
- Motorola – brothers Paul and Joseph Galvin founded the telecommunications and electronics company in 1928.
- Volkswagen AG – a German automotive manufacturing corporation owned by Porsche and Piech family, founded in 1937.
These are some important matters to consider before getting into a family business, and some that will help reduce the risks from such a venture. Take a look at our services to find out how we can with your family run business.
If you are still not certain about the legal aspects of a family-run business, please don’t hesitate to contact us.