Creating a successful business that can support your family is an amazing accomplishment. And building that business with family you love and trust can make it even more rewarding. Unfortunately, family businesses can fall victim to the same infighting that affects any other business.
Studies show that family-controlled companies create more wealth and cash flow than public companies. In addition, the desire to pass a profitable business down to future generations incentivizes business owners to self-manage prudently. On the other hand, family company leadership is often limited to family members, which can become an issue when it comes to qualifications. Moreover, the certainty of employment in a family business can make subsequent generations lazy and entitled, devaluing the entity over time. As reported in the Harvard Business Review, 70% of family-owned businesses fail or get acquired before the second generation takes over.
There are many pros to starting a family business, including working for yourself, employing family members, and having a business to pass down to your descendants. Unfortunately, there are also quite a few cons. Above all, those seeking to form a family entity should ensure working with their family won’t destroy relationships. In this article, our Houston business lawyers discuss the pros and cons of starting a business with family members.
While the crucial business functions of a particular company can vary based on a wide variety of factors, many elements are universal. Keep the venture’s operations and goals transparent for everyone involved and make sure family stakeholders are provided relevant information. Common family business tasks often have both pros and cons, which can include:
Because family members know each other well, there can be less pressure on companies to perform well quickly, leaving more flexibility for investment repayment. This flexibility can ease startup stress for entrepreneurs but it can also slow success down.
Additionally, mixing personal funds or credit cards with company funds or cards is surprisingly common in family businesses, which can lead to distorted profit and loss statements if not accounted for correctly. And failing to properly classify your business could result in overpaying taxes.
Determine how compensation is awarded for each family member who is employed by the company, whether it’s a salary, hourly wage, profit percentage, or something else. Make sure each employee, family or otherwise, understands how compensation works and knows the relevant state wage laws.
It may feel counterintuitive to require the execution of various business agreements with family members. And it can be hard to execute agreements as stringent as you might need with family because you don’t want to hurt or offend a relative.
Family business contracts are not crafted to be unkind to employee and/or stakeholder family members. They serve to promote a professional business atmosphere and protect the company as a whole. Since companies with non-family members use contracts, family-owned businesses should too.
In a family business, hiring and firing can be complicated, as the entity will often choose to keep fellow family members over equally qualified employees. Employment agreements can help mitigate potential conflicts. One disadvantage of an employment agreement, however, is that if a provision needs to be changed, the parties must work together to agree to it. This could be burdensome, especially when making multiple changes.
The last thing you want to think about in a family business is what will happen to the company if and when you are hurt or die. Before opening the business, consider who will be taking over, how the business will be valued, and under what circumstances a founder or stakeholder may step down. You may need to change your succession plan after the business is founded, but you can easily refine it later.
Additionally, make sure to determine the exit plan for each family member involved with the business. Without discussing this up front, a family member may think their contributions led to the business’s success and thus they are owed something. If that person does have an official stake in the business, you’ll need a method of determining what their stake is worth and how they will be compensated if they leave.
Family dynamics often include “favorites” among family members who are treated differently, but favoritism doesn’t work in business. Family entity owners must keep their personal interactions away from the business to keep family relationships and friendships intact. Our Houston civil attorneys are available to help small to medium sized company owners take care of business, so contact us for more information.
The Burford Perry lawyers have extensive experience assisting family businesses. We understand the wide variety of challenges families face working together. We have assisted many family-owned Texas businesses chart their way through family company issues of all shapes and sizes.