Starting a Family Business? Avoid These 6 Common Mistakes

family business dispute

Operating a family business with those you love and trust can be very appealing. However, be sure to avoid these six critical mistakes when starting and running a family business.

by
February 21, 2017

Starting a family business makes sense, most of the time. After all, why wouldn’t you want to work together and make money with the people that you love the most?

Likewise, why wouldn’t you want to share your success with your siblings and children so that they can share in your wealth?

But family businesses also come with their pitfalls. And if you’re not careful, those pitfalls can tear your business, or even family, apart.

Here are six common mistakes that you should watch out for when forming or managing your family business.

1. Failing to Motivate Non-Family Employees 

Inevitably, family businesses aren’t made up entirely of family; most businesses have to hire at least some non-family employees. But those employees can also feel as though they get passed over for promotions, are held to a different standard, or don’t have a space to voice their opinions.

As a family business owner, it’s very important to avoid this kind of favoritism. Although it’s unlikely that a non-family employee would sue over bad treatment, poor management of non-family employees can make it difficult to motivate and retain high quality non-family workers.

Instead, family owned businesses should work hard to hold all employees (including relatives) to the same, strict standards. Treatment and promotion should be based on merit, not entitlement.

Likewise, providing non-family employees with certain advancement and profit-sharing opportunities will make them feel as though they are sharing in the success of the business, increasing their productivity.

2. Failing to Keep Your Personal and Business Lives Separate

Parents, spouses, siblings, and children are prone to have disagreements. It’s just part of being a family. But if you aren’t careful, personal disagreements at home can lead to fighting at work, which in turn can lead to lost productivity, and eventually lost profits. What should be analytical business decisions can turn into fights about what’s going on at home.

Don’t let this happen to you.

First, don’t hire family members who can’t separate their private and professional lives. Second, work hard to encourage business disputes to remain about just that: business. Third, consider hiring an outside consultant when an important business decision needs to be made that family members disagree about. Finally, if your family has issues, consider hiring a family therapist so that personal problems can be nipped in the bud before they spill over into work.

3. Failing to Take Care of Succession Planning

Most families don’t like to talk about what will happen if a family member suddenly has to leave the business. As a result, many family businesses don’t do any succession planning at all.

Then, when someone suddenly steps down, the remaining family members fight and argue over who should run the business. Many times, that rips the business apart.

Don’t let this happen to your business. It may be awkward to discuss succession, but it’s essential that you have a plan in place. It’s even better to put that plan in writing. That way, everyone will know exactly where they stand and your business can continue successfully, even when someone leaves.

4. Not Knowing Whom to Leave Out of the Family Business 

Family businesses are often over-inclusive: they want everyone in the family to participate, and they want everyone to be excited about the family venture. But the fact of the matter is that some relatives just aren’t cut out for business, even when they want to be a part of it. Likewise, some relatives just don’t want anything to do with your business, no matter how strong their business acumen is.

A smart family business learns to let these people go. Hiring and promoting family members who have no talent and no interest will eventually lead to an inefficient, poorly run business. It will also lead to conflicts between family members.

Moreover, hiring unqualified and uninterested relatives looks like nepotism, which leads to disgruntled non-family employees. Put simply: it’s just not a good idea.

Although it’s fine to find some role for family members who want one, don’t forget to maintain your high standards, and remember that your business is based on merit, not favoritism.

5. Not Knowing When to Step Aside From a Family Business

Similarly, you should know when to step aside. Many family members are hesitant to step down, even when they are sick or very old, because they feel personally responsible for the success of the business. Those members can become more of a burden than a benefit.

To avoid these problems, have a firm succession plan in place that includes provisions for retirement upon old age or sickness.

In addition, make consultant or advisory roles available for family members who need to retire; that will make it more attractive for those relatives to step-down, while allowing them to maintain some level of involvement in the business.

6. Not Keeping Finances Separate 

Many family businesses are small. They may even be run out of the family home. As a result, many family businesses also forget to separate their personal finances from their business ones.

This can be deadly for a business. By failing to separate finances, family business owners are likely to make big financial decisions that can bankrupt both the family and the business at the same time.

Instead, families should maintain separate accounts for their business and their personal lives. In addition, family businesses are also strongly encouraged to incorporate or form an LLC. This will prevent the family from being liable for the debts of the business, or vice versa. As a result, if one or the other gets into financial trouble, that doesn’t necessarily mean the other will be in trouble as well. 

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