Do you run a business with your family members? If so, you’re not alone. Family-owned businesses are a key part of the U.S. economy. According to SCORE, family-owned businesses employ 60% of the U.S. workforce and create 78% of all new jobs. They generate 64% of America’s GDP.
Read on to learn more about the challenges and opportunities that come with running a business with your family members, whether that’s your spouse, sibling(s), or children.
What are some challenges to running a family-owned business?
Separating personal and business
One of the biggest challenges in running a family-owned business is separating business and personal issues. For example, when you work with your spouse, sibling or child, it can be tough to keep your personal relationships out of your work and vice versa. You may find it helpful to set parameters around when you focus on your personal relationship, and when you focus on the business – for example, banning “shop talk” at the dinner table.
Check out tips on how to navigate family relationships in business in "How to Thrive Running a Small Business with Family"
However, it can be even more challenging to financially separate out personal and business affairs. Money can cause tension among family members even when they don’t share a business. The best way to avoid financial issues is to set expectations from the outset and communicate with other family member/owners regularly. For example, you’ll want to make sure ownership structure and pay is clear from the moment family members join the business.
Unlike normal employees, you and your family members will likely view the business as a big chunk of your net worth, as well as have an emotional attachment to it. In general, it’s important to be sensitive to the fact that your relationship with your other family members involved in the business will naturally be different than the typical co-worker relationship.
Managing Finances for a Family-Owned Business
One of the key areas to define early on is the ownership structure of your business. Specifically, who owns what percentage of the business? This will likely depend upon who invested the original money to get the company up and running.
However, if multiple family members put up funds initially, or family members invested in the business later on, be sure to clearly outline what percentage of the business each member owns. If you’ve taken out a loan from family rather than offering equity, be sure to treat the loan like you would treat a loan from a bank. Agree upon the payment schedule and amount, in writing, before taking funds from a family member.
Learn more about financing options from family in "Small Business Loans from Friends and Family"
An area that often goes hand in hand with ownership percentages is deciding who makes the important, long-term business decisions. This becomes especially tricky if you’re running a business with a family member you consider a “peer”, like your spouse or a sibling. If you have a number of family members financially invested in the business, make sure everyone’s business responsibilities have been clearly agreed upon by all owners.
It can also be tricky to structure pay fairly in a family business. How do you impartially set your sibling or child’s salary? Furthermore, small business owners often cut back on their own pay to have more cash on hand to invest in the business. You may be comfortable doing this, but your child or sibling may be less comfortable with taking a pay cut. And, you may have family members working at the same level as non-family employees.
All of these factors can set you up for bigger problems surrounding employee pay. To avoid any issues down the line, set out clear expectations around from the very start with your employees, both family and non-family members. This should include doing some market research on average pay for your industry and region. If you employ family members who are also part owners of the business, make sure you’ve clearly defined their total compensation to avoid issues later.
Like most small businesses, family-owned businesses also struggle with succession planning. SCORE reports that 47% of family business owners planning to retire in 5 years have no successor in place.
If you are interested in passing your business on to your children, there are key steps you should take now to get them involved. Consider offering them part-time work or an internship at the family company during their summer breaks from school to get them interested in the business from a younger age. If your children already work in the business full-time, make sure you are preparing them to take over the family business. Have a clear-cut path in place for them to follow. This should include letting them slowly take over more of the decision making for the business, so they are well prepared for when you retire.
Opportunities for a Family-Owned Business
Despite the challenges mentioned above, there are plenty of advantages to running a family-owned business.
First, branding and marketing your business as family-owned can be an advantage. Family-owned businesses tend to be seen as more trustworthy, stable and customer-friendly, according to Forbes. It can be beneficial to your bottom line to highlight your story as a family-owned firm in your marketing.
Beyond just the marketing benefit though, as a family-owned business you likely have especially dedicated employees working at your company (i.e., your children, spouse or siblings). And if you’ve prepared the younger generation appropriately, you also have a built-in successor to your business, which most small business owners struggle to find.
And, at the end of the day, you get to work everyday side by side with your family members. Our customer, Carmen Rodriguez of Brooklyn Cupcake, put it best: “today we are really in love with the fact that we are a family-owned business. I think that sometimes you don’t realize what you’re getting yourself into, but yesterday, which was a busy day for us, we had the rest of the family members here. We sing, we dance, we do a bit of crazy things, and at the end of the evening we hug and kiss each other and I don’t think that there could be anything better than that, honestly.”
Check out our full interview with Brooklyn Cupcake in our article, “How Brooklyn Cupcake Grew from Neighborhood Shop to Nationwide Success”.