Thinking of starting a family business? Sounds great, but here’s what you should consider before you get on with it
We’ve all heard the age-old saying, “Never mix business with family.” It’s often repeated because, well, it’s true for a reason. Starting a business with your family can be a dream come true—or a complete nightmare. I’ve thought about it, and indeed it would be exciting to build something valuable with your loved ones– but it comes with its own set of challenges that you need to prepare for.
In this edition of the SimplVest Newsletter, we’re putting the spotlight on the key considerations you need to keep in mind when starting a family business. Here’s what you’ll learn:
- 👪What to consider before starting a family business
- 💔How to handle disagreements without damaging relationships
- 🏗️The best way to structure your business with family members
Let’s break it down.
What Should You Consider Before Starting a Family Business?
😁The Good: Starting a business with family has its perks. Working with family often means partnering with people you already trust. You’re likely on the same page about long-term goals, and there’s a shared sense of commitment to the business’s success. Unlike regular employees, family members might be more invested, treating the business as an extension of their legacy.
🥹The Not-So-Good: However, working with family isn’t always smooth sailing. For one, mixing family and business can blur boundaries, leading to potential conflicts. Old grudges can resurface, and work disagreements might follow you home, creating tension. Additionally, family members may not always respect the rules and standards you set for other employees, which can create an uneven playing field. For instance, not all family members might have the right skills or be receptive to feedback– imagine trying to caution an uncle on a bad habit and getting hit with the “you are rude/ lack respect” bomb. Yikes.
➕What to Do: Before jumping in, have an open conversation with your family about the potential drawbacks. Discuss how you’ll handle conflicts, ensure everyone’s roles are clearly defined, and make sure the person you’re partnering with has the right skills and commitment to the business.
How to Handle Disagreements in a Family Business
Disagreements are inevitable in any business, but they can be particularly tricky when family is involved. Here’s how to navigate them:
🤝Regular Check-ins: Schedule regular family meetings to discuss business progress and any issues that may arise. These check-ins keep everyone aligned and provide a space for open communication, which is key to resolving conflicts before they escalate.
🫂Create a Conflict Resolution Process: Establish a formal process for resolving disagreements. This could involve mediation by a neutral third party or a family member who isn’t directly involved in the business. By agreeing on this process before any conflicts arise, you can prevent minor disagreements from turning into major rifts.
📃Develop a Code of Conduct: Your business should have a clear Code of Conduct that outlines expectations for behavior, decision-making, and conflict resolution. This code can be included in formal documents like an Operating Agreement or Partnership Agreement, ensuring everyone understands the rules from the start.
🪦Plan for Exits: Create an exit plan that outlines how a family member’s departure from the business will be handled. This plan should cover situations like voluntary exits, incapacitation, or death, ensuring that the business can continue smoothly regardless of what happens.
Structuring Your Family Business
Choosing the right business structure is crucial when working with family. The structure you choose will impact decision-making, ownership, and liability.
Ask Yourself:
- Do all family members want an equal say in day-to-day operations?
- Would some prefer to be silent investors rather than active partners?
- How will ownership be divided?
- Who will make major decisions?
These questions can help determine whether a corporation, LLC, partnership, or other structure is the best fit for your business. For instance, a corporation might allow for silent investors, while an LLC can offer flexibility in management and ownership. Consulting a lawyer can help you make the right choice.
Can’t figure out what type of business to start?
Take a look at some of the inspiring success stories we’ve covered:
- Lanre Vigo: Kicking It with the Most Bankable Sports Agent in Nigeria
- Dom Eromosele: Building and Nurturing Africa’s Gaming Community
- Sarah Idahosa: The Nigerian Queen of Web3 & DeFi
- Nkem Michael Onuorah: Championing Innovation and Community
- Inside Hyelhirra’s Journey: Student CEO & Fashion Innovator
- From Chemical Engineer to King of Movie Communities: An Interview with King Monye
- Christian Sanya: A Story of Determination and Success
- Oluremi Martins: Her Secret to a $30k Monthly Revenue Business
- The Untapped Potential of Vending Machines
These stories might just spark the perfect idea for your own family venture.
Essential Legal Documents for Family Businesses
Starting a family business requires more than just a handshake. Here are the key documents you should have in place:
Formation Documents: Depending on your business structure, you’ll need documents like Articles of Incorporation, Bylaws, or an Operating Agreement. These establish the legal foundation of your business and outline the roles and responsibilities of each family member involved.
Partnership Agreement: If you’re forming a partnership, a Partnership Agreement is very important. It details how profits and losses will be shared, how decisions will be made, and what happens if one partner wants out.
Non-Disclosure Agreement (NDA): To protect sensitive business information, especially when working with family, an NDA can be a wise addition. It ensures that business discussions stay confidential.
Estate Planning Documents: Consider creating a Will, Living Trust, or Power of Attorney to manage what happens to your share of the business in case of incapacitation or death. These documents can help prevent family disputes and ensure a smooth transition.
Keeping Business and Personal Finances Separate
One of the biggest pitfalls in family businesses is mixing personal and business finances. Here’s how to avoid that:
Separate Accounts: Open separate checking, savings, and credit accounts for your business. Never use personal accounts for business expenses.
Avoid Personal Guarantees: While it might be tempting to personally guarantee a loan or expense, doing so can blur the lines between your personal and business finances, leading to complications down the road.
Hire a Professional: Consider hiring a bookkeeper or tax professional to help manage your business finances. They can ensure everything is above board and help you avoid potential legal and tax issues.
Final Thoughts
Starting a business with family is a big step, but with the right preparation, it can be incredibly rewarding. Take the time to plan ahead, and you’ll be in a much better position to succeed.
