In law school, I had a professor who used to say: “Never go into business or buy real estate with a family member. Trust me!” At the time I wondered what could be so bad about mixing family with business. I mean, family businesses have been around longer than LLC’s, corporations, and non-profits combined. There are lots of good reasons why people go in to business with family members. They know one another’s strengths and weaknesses, they can pool their resources for the good of the family unit (however it may be defined), and they generally like / love / respect one another. What could go wrong?
Unfortunately, going into business with your family carries with it particular risks, along with the potential rewards. Communication can break down. Interpersonal conflict can become business conflict in the blink of an eye. Formalities fall by the wayside and it can be difficult to figure out: What happened? What should happen? What will happen? The lines between “family” and “business” get easily blurred and this can wreak havoc not only on the business, but also on the underlying family relationship itself.
How can you make sure you’re among the thriving family businesses and not among the fallen? Here are three things to consider.
- Get those ducks in a row! It’s a bit counter-intuitive, but corporate formalities are especially important in family businesses. This doesn’t necessarily mean that you have to hold formal meetings and take detailed minutes, but you should make sure that there’s a clear record of the following: (i) Who will participate in the business? (ii) What will each person contribute to the business? (iii) What does each person want or expect to get out of the business? There are many ways that the business can be structured to meet each person’s needs. Not every person who contributes to the company needs to be an owner. Maybe Uncle Walter’s contribution should be considered a loan. Maybe one spouse should be an employee or an independent contractor. No matter what you choose, make sure that the company is properly formed and filed with the Secretary of State so that you get the full advantage of liability protection. And as soon as its feasible, make sure you loop in a trusted insurance advisor, accountant, and lawyer to review your situation and help you troubleshoot any remaining issues.
- Talk about it! After your ducks are in a row (that makes it sound so cute and easy, right?) make sure that you have a written record of what you’ve decided. And make sure that everyone knows what’s going on. Again, it’s counter-intuitive that family businesses need extra focus on communication. But it’s easier to make assumptions about what a person knows or to forget what you’ve talked about when the topics can jump from the upcoming family wedding to whether or not to take on a new business partner and back again. No matter what the paper agreements say, if you’re all on the same page about what to expect, you’ll avoid most of the difficult pitfalls and will be better able to navigate the rest. In addition, taking extra steps to have good communication can help you identify and address the interpersonal dynamics between the participants. The underlying relationships can either turn the business into a well-oiled machine or can quickly spiral the business into chaos.
- It’s the real deal! Now what’s it worth? Valuing any business is an art, not a science. This is especially true for closely held family businesses, largely because the line between “family” and “business” is so easily blurred. If it’s a unique business, it may be hard to find comparable situations that valuators can rely on for guidance. Not to mention the fact that hiring someone to value a business can be taxing on the budget of a family business. This issue can be hard to think about when the business is just a baby. But you can and should determine a default method by which you’ll arrive at a value. It can be as simple or as detailed as you like – the important thing is that you talk about it ahead of time.
Owning a business is like owning a home – there’s always more to do. If you’ve tackled these items and are ready for more, then go ahead and dig deeper. Do you have contracts in place on your key agreements? Safeguards in place in the event that a key member dies or leaves? What will happen if spouses divorce? Ask the questions, gather the info, and make a record. You’ll be glad you did.