Here are five common pitfalls:
You lose their money: This is always the biggie. We always hear “Don’t invest money you’re not prepared to lose,” and I’m sure most people do feel that way when they put their money in the hands of a friend or relative. But when that money goes down the drain, people tend to become a lot less philosophical. They may say “Hey, don’t worry about it, I took the risk,” but in all likelihood your relationship will forever be tainted — whether subtly or dramatically — by the experience. Family money is often said to be the easiest to get, but it can also be the most expensive.
A deal goes bad: A good friend of mine recently did a real estate deal with one of his close relatives. They thought it’d be a hoot and they’d make a few bucks together, never anticipating that anything could possibly go wrong. But when some critical issues came up, they wound up at an impasse that turned ugly and expensive. Let’s just say they’re no longer as close as they used to be. Just like in any business matter, no matter how foolproof you think a plan may be, it’s wise to assume things can and will go wrong. And “family wrong” can be much worse than “business wrong.”
The business comes to the family picnic: There are people who can completely shut off work and draw a solid line across their lives when they close the office door behind them. I admire such people, though I know very few of them. The rest of us inevitably bring our working lives home with us in one way or another. When you do business with family and friends, at some point you’ll be with them at a barbecue, birthday, cocktail party, or wedding. If there’s tension (or worse) brewing between you, aside from your own discomfort, it will affect — and potentially infect — those around you. The result can be anything from short-term awkwardness to a full-on Hatfield/McCoy disaster.
You can’t un-ring the bell: Once you remove the “arms-length” and start doing business with people who are close to you, you often start down a course that’s hard to change or reverse. Whether it’s setting expectations (free or discounted products and services), or creating problematic assumptions (“I thought I was going to get a cut of all these referrals”), changing or getting out of friends/family dealings is much harder than business-as-usual.
There’s collateral damage: I’ve been in several situations where I’ve gotten involved with friends or family peripherally, by networking or making business connections for them. And a couple of times it came back to bite me. I’ve introduced friends to my own important business contacts, only to have that introduction turn sour. We all like to think that grownups can keep clear heads about these things, but again, human nature is such that it’s always easy to be calm and philosophical going in, much harder coming out. If you decide to play matchmaker, make sure it’s very clear to all parties that you are simply making an introduction, the rest is completely up to them. In fact, I’ll often come right out and say (only semi-humorously) “don’t blame me if you wind up hating each other,” just to put it out there. In fact, if you have any hunch that you might be making a risky connection, it’s best to bite your tongue.
Of course it would be great if doing business with those closest to us was a risk-free, rewarding pleasure. Certainly sometimes it works out fine, but often times it doesn’t.
As with many things in business, it is helpful to try to anticipate the worst-case scenario (a mildly ticked-off.
Decide who owns what
Decide who owns what percentage of the business. You may decide to split the ownership 50/50, but there may be reasons for not doing this. Maybe one of you is going to be full-time and the other only part-time? Maybe one has more equity or capital to invest in the outset?
Put together a contract
Create a written agreement, describing who does what, how much of the business each person owns, and listing what happens if someone wants to leave the business or if there are problems. Then make this agreement legal using a solicitor.
You should also consider registering your business as a limited company through Companies House.
What is a limited company?
A limited company is a company in which the liability of members or subscribers of the company is limited to what they have invested or guaranteed to the company.
Limited companies may be limited by shares or by guarantee. By limiting your company, you will give it a separate legal identity, limit the owner’s liability, benefit from some tax advantages and give you options for raising new capital. It also adds credibility and prestige to the business and means nobody else can copy your company name.
Draw up a shareholder’s agreement
This is a vital part of protecting the business and your stake in it.
It also prevents arguments ensuing later down the line – something which becomes even more tricky when you have a close personal relationship with your business partner outside the office.
There is nothing worse than having to tackle awkward conversation around the family dining table or continue with a friendship which has been tarnished by workplace disagreement.
What is a shareholder’s agreement?
A shareholders’ agreement is the business version of a marital pre-nup.
It defines what happens if people want to go different ways. It is a safeguard offering a set of terms to prevent complications further down the line, protecting the enterprise itself as well as your own investment.
An agreement will:
• set out rights and obligations
• regulate the sale of shares in the company
• describe how the company is going to be run
• provide an element of protection for minority shareholders
• define how important decisions are to be made.
What should you include in your agreement?The key provisions to include in a shareholders’ agreement relate to:
Issuing and transferring shares, including provisions to prevent unwanted third parties acquiring shares and how a shareholder can sell shares
providing some protection to holders of less than 50 per cent of the shares – including requiring certain decisions to be agreed by all shareholders
Rule No. 1 – Don’t put family members on the payroll if they’re not working in the company or can’t make a real contribution to the business, advise SCORE small business counselors. In a start-up or family business, everybody does everything. But this is where a lot of conflicts occur. Make sure that everyone has a role and responsibilities that are spelled out and are very clear, says Jane Hilburt-Davis, president of Cambridge-based Key Resources and co-author of Consulting to Family Businesses. Establish each person’s title, job function, and compensation. And make sure that you have performance reviews for family and non-family employees alike, she adds. Moreover, think twice about offering a contract to a supplier who is a relative. Award contracts based on merit.
Rule No. 2 – Don’t create two classes of employees—family vs. non-family. Be careful not to show family members special treatment. Be aware that, in a small or family-owned business, special favors given to family members and friends de-motivate employees and set a bad example, caution SCORE counselors. Also, you don’t want non-family members to feel like a raise or promotion is out of their reach because they aren’t part of the family bloodline.
Rule No. 3 – Be careful not to abuse family relationships. Meaning, don’t either reward or punish someone because they are a relative with whom you have personal history, says business and tax consultant Augustus McMillan. “If others are disciplined for bad behavior, your family member must be disciplined also.” At the same rate, you need to reward and praise exceptional work. “Treat any employee, including family members or friends, special if they deserve it,” says McMillan, who started his career working with business clients as a bookkeeper in his mother’s firm in the mid 90’s before launching his own, McMillan Consulting in Baltimore.
Rule No. 4 – Communicate honestly and openly with employees. Don’t keep it a secret or hide the fact that you have relatives or friends working for you, says McMillan; otherwise when it eventually comes out, and it will, you’ll appear like you were being deceitful. Also, non-family employees shouldn’t feel like family members are more ‘in the know’ about what is happening with the business. The ability to have an effective communication with all members of the organization is critical. To foster a better climate among employees and improve continuous two-way communications consider holding company retreats in addition to family retreats. Hilburt-Davis also suggests that family members attend industry workshops or conferences. “These are a great opportunity for them to learn how to work together and to communicate better.”
Rule No. 5 – Don’t confuse family decisions and business decisions. SCORE counselors suggest you avoid letting family members borrow company vehicles or allowing them to ask the company’s IT person to set up their home offices. It’s also a bad idea to pass off personal expenses, such as family vacations, as business expenditures. These are perfect examples of meeting family needs with business resources, says Hilburt-Davis. “You don’t want to do that. You have to professionalize the business. Ask yourself what you would do if this person was not a family member.” For example, do all employees have access to the company car for personal use upon request?
Rule No. 6 – Establish healthy boundaries between family and business. This especially applies to copreneuers (husband-and-wife teams). Running a business together with your spouse is a balancing act. Agree and adhere to some kind of system, for example, some couples refuse to drive to or from work together. Others won’t talk about the business after 6pm, at home on the weekends, or during family vacations. Try to get away from the business quite a bit, advises Wayne Rivers, president of The Family Business Institute in Raleigh, North Carolina. “Turn off the cell phone, leave the laptop at home, and go to the island for ten days,” he says. “If you don’t tend to the relationship outside of the business, you won’t have a relationship.”
In general, it should be a rule not work with other family members off the clock and outside of the office. McMillan says it’s perfectly fine to ask someone a question about a project or client when you’re at the family cookout. But ideally this should be a five minute conversation, he says. If it goes well beyond that—15 minutes or more—you may be crossing the line, because now you are infringing on someone’s personal time.
Rule No. 7 – Use family councils to address family matters. Some family members will share the same values but not the same vision. One sibling may want to grow the business and keep it privately owned while another sibling may want to sell it or take it public. Hilburt-Davis says a structure that more and more family businesses are creating to help resolve these types of conflicts is a family council.
A family council comprises members who may be owners but not company employees. They meet monthly, quarterly and/or annually for the strategic planning of the business over the next year to next 10 years. The more dysfunctional the family is the smaller the group to begin with, cautions Hilburt-Davis. Ideally you want to reevaluate the council after two years, at which point you may open the membership up to other family members and the next generation.
The council does not micro manage the business but addresses family issues or concerns relative to the business. If a family member is working in the business buts needs a car this is something that the family council will address. Or if a family member needs to borrow money, the council will decide if it wants to create a fund for the purpose making family loans. It’s not uncommon for family members to sacrifice income or take a pay cut to keep the business afloat during tough times. Again the council would examine how best to compensate these family members going forward.
Some family councils help establish three sets of plans: individual ones that help each member of the family determine his or her own professional goals; family plans that determine the overall goals of the family and the resources needed to achieve those objectives; and, business plans, which address such issues as ownership, management control, family involvement in the business, and long-term strategic direction of the business.
Typically one family member of the council is appointed to report to board members or shareholders. He or she would present family decisions about any type of policy procedure for the board’s stamp of approval. Think ahead. If you plan to seek private investors or go public in the future, dealings with family members outside of a business environment will be questioned and scrutinized.
Great day champions.
The Luxury King