09 August 2022

Is it a bad idea to start a business with a family member?

Services:

Expansion & Improvement

Family businesses are everywhere. The Institute for Family Business estimates that they employ over 14.2 million people, accounting for 51% of all those employed in the private sector, or 40% of employees in the whole economy. Even so, the question of whether it’s a good idea to start a business with a family can be a tough one to answer.

Hassan Behcet has worked with a range of family businesses over his career, from SMEs to national networks to help them grow and succeed. He explains the pros and cons of keeping it in the family and how to maximise your chances of success.

 

When family become founders

Family businesses are common for a reason - starting and running a business is hard and fraught with stress. Today, 20% of small businesses fail in their first year, with 60% of small businesses not lasting beyond the first three years. However, family businesses seem to fare slightly better, with almost two out of every five medium-sized family firms passing down through at least one generation of the same family.

I have my own experience with this – for better and worse. I grew up alongside my father’s business that he ran with his brother then, later, his brother-in-law, and went on to inherit it for a time. I saw firsthand how family can either be your greatest strength when running a company or lead to problems if you don’t put the right measures in place.

 

The nature of family businesses

Part of the reason that family businesses are so common is that a company can be like a family, or even a marriage. The core founder relationship is the foundation of the organisation and, just like family, founders can either bring the best out of each other or end up clashing to the detriment of all around them.

Beyond the founders, businesses are built on networks of relationships. The better those relationships function, the more productive they are for all involved. Starting a business with a family member can streamline the process of finding a business partner by connecting with someone you trust, who understands your goals and motivators and who, in theory, has your best interests at heart.

This immediately removes one of the biggest challenges and risks involved in going into business. If this partner also compliments your skillset, nature and approach then you have a strong foundation for success.

 

What are the advantages of starting a business with a family member?

Starting a business with a family member offers several distinct advantages which can be especially useful when starting out:

 

The right business partner

Like any relationship, a founder relationship requires trust, shared vision and honesty. Finding a new business partner who fits this bill can be a huge challenge.

Starting with a partner who you know well, in terms of strengths and weaknesses, saves you the time and effort of hunting for and reviewing potential candidates, as well as reducing the risk of taking a chance on an unknown quantity. Especially because with family your interests are already aligned in terms of benefiting your broader relationship network.

 

Streamlined startup

With a partner found, you can start putting together a group more quickly and start developing a business model right away. Family connections can also make a significant difference to a business’s early chances of success, where family members can provide labour at a rate the business can afford.

 

Long term succession planning

Over time, these businesses can pass naturally along familial lines, solving many of the thorny issues that comes with succession planning and passing on a company. Younger family members who have grown up alongside the company often become intimately involved at an early stage, learning about various parts of the organisation, becoming ideally placed to take on ownership.

 

Risk-proofing a family business

The chief dangers from starting a business with a family member come when the ‘family’ gets in the way of the ‘business’. While personal issues can be a risk in any business, family falling-out can be especially dramatic as professional factors influence relationships and vice versa.

One of the most reliable ways to safeguard against this is to build in structural and formal safeguards that protect the business from family, protect family from the business and put in place contingencies for managing the fallout if things happen to go wrong.

 

Formalise roles and responsibilities

In the early days of a business, it can be useful to have more hands pitching in on an informal basis to help as needed. However, as a business grows this can lead to muddy processes, team members interfering in areas beyond their remit and resentments if things don’t go a certain way.

It’s also important to address the actual question of who owns and does what in order to effectively address and manage expectations. A corporate structure that enables clear communication and accountability is a must-have in order to effectively scale.

 

Clarify ownership

Just as it’s important to make sure family members don’t interfere in the business, it’s essential to make sure everyone feels their stake is safe and clearly distinguished.

Issues of employment, compensation and reward must be explicitly documented to avoid potential issues, giving each team member the clarity and space to make their division as successful as possible.

 

Plan for ‘just in case’

One of the major issues in any business is how to divide the assets when things don’t go to plan. In a family business, this can be especially damaging in a family where the personal and the professional are tightly bound together.

One way to make the process less painful is to structure the business with clear divisions of assets from the beginning, enabling the company to be divided and wound down effectively. In this scenario, each party gets their due without needing to wrangle to secure what they feel they’re owed.

 

Plan for success in your family business

Going into business with a familiar face can be a huge advantage, but to make the most of the potential you need the right advice, structures and processes. Working with an experienced professional can help you leverage these natural advantages in the context to build a company that will generate value for generations.

At Haines Watts, we’ve helped family businesses go from startups to leaders in their field, empowering every family member to make their own impact while providing impartial, expert advice.

 

Get in touch with one of our team to get the advice and support you need to create the foundation for success in your family business.

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