Launching or investing in an independent business is a big step; self-employment is wrought with challenges. From product development to financial management, and everything in-between, sustaining your self-inspired venture calls for dedication, flexibility, and relentless attention to detail. Accounting for all the elements of self-employment is a tall order, yet some entrepreneurs add another wrinkle, choosing to start or join a family business.
Participating in a family business can be rewarding, but the prospect also includes pitfalls, which can undermine commercial success. If you are contemplating a role in the family business, or you’re ready to launch one, considering all the angles up-front may help you avoid problems down the road.
A Family Business Has Unique Requirements
Like most commercial ventures, family businesses exist to generate profits. Despite the similarities to other for-profit endeavors, however, family businesses are also built upon close personal relationships. Effective business management accounts for both aspects, balancing profitability with an organization’s family ties. U.S News contributor, Erinn Ford, recently explored some of the concerns facing small business entrepreneurs involved in family operations.
For prolonged small business success, consider the following entrepreneurial elements, which may come to bear on your family business.
- Compensation Rates – Irrespective of personal relationships in professional environments, business success boils down to profitability. Compensation decisions dramatically impact your bottom line, so establishing affordable rates of pay is essential for long-term viability. In most cases, you can take compensation cues from the market, structuring your own pay packages to match similar jobs in your area.
Though you may be tempted to overpay family members, individual work experience should be considered, before offering commensurate compensation. Not only does inflating salaries for family members undermine business finances, but paying too much also risks alienating unrelated employees, expecting pay parity.
- Hiring and Personnel Decisions – Human resources are undeniably your greatest business asset, but staff can also become a liability. Compared to business ventures without relatives on staff, family businesses must be particularly careful making personnel decisions. When determining who to hire and which positions are best suited for family members, candidates’ skills and qualifications should guide hiring decisions. Hiring dynamics are complicated with family on board. Having multiple members compete for the same position, for instance, underscores the first rule of family business hiring: You can’t please everyone, so don’t bother trying.
Founders aside, your business may not have a role for every family member. And there are no guarantees relatives will be qualified to fill vital roles within the organization. In order to hedge against hiring missteps and protect the integrity of your company’s personnel practices, you may wish to conduct outside searches for qualified job candidates, allowing family members to compete for positions.
- Succession Plans – Perhaps more so than ordinary commercial endeavors, family businesses often have low turnover, particular at the highest levels of an organization. Planning for succession and staff mobility provides a blueprint to follow, as founders and other staff members age out of the workforce. When will you retire? Who will take your place? Will you contribute on a part-time basis or retire altogether? Answering questions such as these mitigates disagreements about succession, keeping family members on the same page. Decisions are not set in stone; you can adjust succession plans as your business evolves.
In addition to succession planning, it is also important to account for your employees’ future – whether or not they are members of the family. Retirement savings plans are essential for retaining dedicated, skilled employees, yet family businesses sometimes fall short providing retirement resources. Various factors influence your best approach planning for retirement; options include 401(k), individual retirement accounts, profit-sharing, and any combination of investment vehicles. Consulting with a professional advisor ensures you’re on the right track, providing for family and non-family employees.
- Selling the Business – According to the adage, all good things must come to an end, which may hold true for your family business. At a certain point in its evolution, selling a family business may make more sense than passing it to the next generation. When change is on the horizon, it’s best to approach the matter head-on, getting a true read on family members’ positions about a sale.
As a founder, your business probably represents your most valuable asset, so you naturally want compensation for a change of ownership. Though selling businesses outright results in career-wrapping windfalls for many owners, transferring a family business may not provide the same type of opportunity. The transaction may be funded, at least in part, by ongoing profits, so you may not be paid all at once.
If you plan to sell your business to a participating family member, terms should be established in advance, ultimately leading to a sales contract. Which family members are involved in the sale? Will the new owner(s) get outside financing to close the deal? Do the conditions of the sale adequately provide for your retirement? These are only a few of the questions needing answers, before proceeding with a family business transfer.
Setting a price can be a particularly sticky point for intergenerational business transfers. While you want family members to be treated fairly, you must also protect your own financial interests. Though it may seem impersonal, a market-based approach is one way to price your business, satisfying everyone involved in the sale.
Self-employment is an ambitious pursuit, under any circumstances, but sustaining a family business adds another layer of concern. Though working alongside trusted family members has advantages, you must also recognize its downside and take steps to avoid pitfalls.