How NOT to Run Your Family Business

Photo: mangostock

Family businesses are a staple of our economy, so they're with us to stay. We need them to be successful, especially now, when economic growth is critical.

What is a "family business"?

  • A one-owner company where non-owner family members hold positions in the business. For instance, a woman who employs both of her parents owns the wonderful deli where I get my lunch every day. Although the parents are not owners, this is a family business.
  • A multiple-owner company where two or more of the shareholders, partners, or owners are related; whether by blood, marriage, or domestic partnership. Even if only one, or even none, of the family is active in the company, this is a family business.

Over the years I've worked with many such businesses. Some of the struggles that I've seen have been made worse, or even caused by, the "family business" status of the company. Here are some critical, and in some cases fatal, errors that a family business can make.

1. Comingle your family's personal and business funds.

It "all comes out of the same pocket anyway." I know…sometimes it seems like so much work to separate everything. Please avoid the temptation to take shortcuts, and treat your business like the separate entity that it is.

2. Put a family member in charge of the money without typical internal control procedures.

Even if the family member has always been great with money, it does not mean you don't need checks and balances. Ensure that your policies and procedures are just as stringent as they would be if an outsider was doing the work, and have your internal controls reviewed by your CPA.

3. Put your children on the payroll to fund their college education AND don't expect equal work for equal pay.

This is a popular tax planning technique taken one step too far. (You get double points for this one when the IRS auditor finds out, and your employees love it too.) Family members should be setting the example, not being the exception.  Their pride in the business will be contagious.

4. Make sure that family member employees have better "perks" than non-family member employees; after all, they're family.

What is the motivation for the other employees to excel if they don't see the same rewards? Be sure to treat everyone equally.

5. Bring your personal issues to the office.

This is a major cause of productivity problems in a business. Set a great example of professionalism and the good employees will follow.

6. Take your business problems home.

This is common in husband/wife or domestic partner-run businesses. It's a "twofer"; you have the opportunity to ruin both your business AND your relationship! Agree on boundaries, and stick to them. If you need assistance, work with a family counselor.

7. Don't do any estate planning which protects the family and business from estate taxes and probate costs.

A well thought out estate plan will save much more than it costs.

8. Ignore contingency planning for how the business and family will manage if something happens to the most active shareholder.

Be proactive in guaranteeing your business a legacy for generations by purchasing life insurance to fund the cost of transition.

9. Assume that the next generation will take over when you're ready to retire.

Don't assume that just because they've been around the business their entire lives, they'll know how to run it. Start grooming your successor several years before you plan to retire. If no family member wants to run the business, and you don't want to bring in an outsider, now's the time to put together a detailed exit plan for a sale or merger.

These errors aren't usually intentional, but they damage the business — and often the family — just the same. Some are a recipe for employee fraud while others cause management, cash flow, or tax problems, not to mention creating workplace or family issues. To avoid problems, talk to your attorney, CPA, or another adviser for professional guidance.

I wish you much success with your family business!

Have you experienced any of these situations in your career? What solutions worked best for you? Share your successes by leaving a comment below

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