4 things to know before you start a family business
You and your brother have been making craft beer for years, so now you’ve both decided to go all in on running a real brewery. You can’t wait to grow a successful business, and maybe someday pass it on to your kids.
But before you get ahead of yourself, know that starting a family business is not an easy venture. For starters, personal relationships can get in the way of making tough business decisions (e.g. cutting back on your cousin’s hours and pay, even though you know he’s saving for his wedding), and research shows that there’s a huge risk the business won’t survive for long.
To get a better understanding of family businesses — and what it takes for them to succeed — we spoke with two experts at Wells Fargo who have counseled several entrepreneurs in this position: Richard Watson, senior director of planning, and Jeremy Miller, a wealth planning strategist. They have insight into why so many family businesses fail, when to make a plan, and why you should ask for help.
Here are four things to keep in mind before starting a family business:
1. The benefits are undeniable.
There are obvious reasons families choose this route: They get to work for themselves, dictate their own hours, create a fun work environment, and potentially leave a legacy within the business and their family. Working together in this capacity can potentially help facilitate closeness within a family, says Miller.
“It bonds the family and creates a common purpose,” he says. “It allows the family to spend time together, which would otherwise not happen if it were just Dad and Mom running it.”
2. Many businesses fail — for the same two reasons.
Here’s a grim statistic: “There are several studies that suggest 70% of family businesses fail from one generation to the next,” says Watson. “It’s even lower when you move down to the third generation.”
Many run into the same two issues: taxes and structural conflicts. For example, estate taxes (the taxes owed to the government to transfer property after death) hurt many family-owned businesses. When an owner passes away, his or her estate often can’t afford to pay these taxes upfront.
Conflicts can also take a toll and often stem from disagreeing on what to do with a business. Miller describes a common scenario where some family members will view the business as a “cash cow” and try to draw money out of it, while others want to invest further in the business.
That’s why it’s important to know what you’re getting into and plan for any potential issues.
3. Make a plan before it’s needed.
A divorce, sudden death, or disability can throw a wrench in a family business, so you need to answer the important questions ahead of time: How much will everyone be paid? How many shares will everyone get? Who will eventually take over the business?
Not everyone can do everything. Watson and Miller advise creating a document detailing the rights and duties of everyone involved, such as a shareholder’s or buy-sell agreement. You should write formal job descriptions and determine salaries by using online resources that track compensation for various positions.
The key is to do all of this in advance … or you’ll be forced to make spur-of-the-moment, emotional decisions that could spell disaster for your company.
4. When in doubt, consult a team of experts.
Even if you feel confident in your business plan, it never hurts to ask for help, preferably from an objective non-family member. As soon as you decide to start a family business, go to a team of experts — a financial advisor, accountant, consultant, and attorney — to help you create a process that will expand your business while avoiding conflicts down the line.
In an ideal world, a great idea combined with a great family would equal a great family business. Sadly, that’s not always the case. Creating a successful family business requires careful planning, an understanding of the risks involved, and, in most cases, outside help to steer you in the right direction.
This post is sponsored by Wells Fargo.