The average adult spends 40 hours or more a week with their bosses and coworkers, and the bulk of the rest with their significant others - spouses, partners, children and other relatives. Merging these two worlds by starting a family business could bring lifelong success or be a recipe for disaster - depending on how it's handled. To date, more than 70 percent of U.S. small business owners are working with family members in some aspect of their business. Below are some tips and best practices to help "keep it in the family," without loosing your mind.
The Perks and Drawbacks
Working with family is ideal in theory because you already have a knowledgeable foundation of their personalities and (hopefully) an idea of their work ethic. In a family business there may be more wiggle room to work a flexible schedule so you can tend to your children, parents, or other obligations because you're all in it together. Think about it - wouldn't Grandpa want to go to Jr.'s baseball game too?
Contrarily, family/business and family businesses will always present their fair share of challenges. For instance: hiring or promoting relatives who do not have adequate skills for the position will waste valuable time and resources that you don't have to spare - and will create bad blood between your non-relation employees. Make sure your relative is the right fit before you incorporate or hire. In family business, you'll also face unique challenges such as succession discussion, sibling/parent/spousal dynamics and the lack of a professional filter when it comes to the difficult conversations.
The most successful family-owned businesses anticipate and discuss these perks and drawbacks before starting the company - and most importantly, do their homework and have a legal framework in place at the beginning. Here are four legal steps to protect both your family relationships and the future of your business.
1. Blood is Thicker than Water, but Contracts are What Count.
A handshake doesn't cut it in the corporate world, no matter how close you are: Get everything in writing. Founding a company always involves stress and friction, and you won't always see eye to eye with your family members. The clearer you are in the beginning, the more likely your family partnership will last. For instance, a standard business partnership agreement defines the business terms of working with partners, including the sharing of profits, separation of work, expected contribution amounts, ownership interests and buy-out options.
2. Define Roles and Manage Relationships with an Employee Handbook.
Your business prospects are only as good as your relationship with your partners and employees - every relationship benefits from clear communication and division of duties. Some of the smartest things you can do for your business are defining roles and commitments with employee contracts and non-disclosure agreements, and establishing company policies in an employee handbook. Don't forget to cover health benefits, vacation time, company email policy, and any other details you want in writing. Having your policies in writing from the beginning can help avoid issues down the road.
3. Family Ties may Make a Business Stronger, but also Harder to Let Go. Have an Exit Strategy.
The responsibilities, priorities and demands of both family and professional relationships often change over time. Sometimes, even the best intentions aren't enough, and things just don't work out. A buy-sell agreement (also called a "business will" or "business prenup") determines what happens if a business partner dies or decides to leave the company. It includes provisions for death, disability, retirement, divorce, and transfers of the company. It can help you avoid financial and tax problems that could result if steps aren't spelled out while working with partners.
4. Protect your Legacy by Planning Properly for the Unknown.
Another critical element of your exit strategy is planning for retirement, illness and death. Just as CEOs of large corporations must plan to protect shareholder investments, you should implement a succession plan to protect your stakeholder's emotional and financial interests. Transitioning ownership of the family business to a new generation is often more complicated than it sounds. It's important to consider the type of entity you own and ensure you have adequate disability and life insurance to protect your family and business against the unthinkable. As always, consult with an attorney to make sure you're on the right track.
Relationships are complicated, familial or otherwise. And while we can't prevent the fight over burnt casseroles at Thanksgiving dinner - we can mitigate the hurt and potential costly effects of bad blood over businesses. So, employ these legal structures, make sure they are clear and agreed upon by all parties and then go enjoy Jr.'s baseball game - together!
Lisa Honey is the Business Lead for Rocket Lawyer's Legal Documents business line. She left the traditional practice of law after seven years in commercial and civil litigation to join Rocket Lawyer. She's licensed in California, Texas and Arkansas.