Should Your Startup Be A Family Business? The Pros & Cons

As a startup, the question of who to partner with to help you achieve your end goals inevitably enters the discussion. If you’re close with your family, and you believe they have assets that will help your startup, the option of including them in your venture may make a lot of sense. Let’s face it – family businesses have been around a long time, and when we talk about family businesses, we are describing an extremely wide arc.

Consider that Buckingham Palace is essentially the headquarters for a family business in England that goes back centuries and has both a House of Commons and House of Lords serving as boards of directors. The CEO is selected by historical precedent and it’s darned hard to opt out of the family business. Whether you’re Queen Elizabeth or Bob of Bob’s Family Barbeque, the pressures of keeping a family business on track are enormous. The risks are great–but so are the rewards. If this a path you’re considering, you may want to take a look at these pros and cons before you make your decision.

Pros of family businesses include:

Working with people you love and trust. This is a huge one. If you come from a tight-knit family where people have defined roles and know what to expect from one another, you have several of the most important business bases covered already. Family members are more likely to do what it takes to make a business succeed than outsiders because they experience the value of a successful venture every day of their lives.

Building a legacy that sustains your loved ones through the years. Many people would rather leave their heirs with a viable business than a cash inheritance. The allure of creating a profitable enterprise that will last for generations is what motivates many entrepreneurs to found family businesses. It can be a powerful incentive to find ways to survive the startup phase, which claims the lives of many small businesses.

Providing opportunities for family members. If one of your dreams is to create job opportunities for you family members, then by all means you should consider a family business startup. There’s nothing more satisfying to a certain type of entrepreneur than being able to offer a real job to a relative, be it spouse, child, sibling or other family member. It enriches your relationships with those family members and tells your community something important about your family.

Creating a family philanthropic focus. If you are bold enough to imagine that your family can create something meaningful by working together, then you are probably bold enough to envision the day when that venture allows you to give back to the community in the name of your family. Many successful family businesses reach the stage where they can establish a philanthropic foundation that directs some of the profits from the business to charities that the family, as a group, supports. This takes your name to a new level in the community, and allows you to actually make a difference with your dollars to a cause that is close to your heart.

Cons of family businesses include:

Limiting your ownership team to your gene pool. By definition, a family business is owned by family members. These are the folks who will be most closely invested in your new venture. The family business can become just one more venue in which to act out family drama. If there are fallings out among family members along the way, the impact on the business can be especially nasty. Perhaps even worse, the day may come when none of your family members wants to be a part of the business. This can be emotionally devastating for someone whose dream has been to build a family business that lasts into future generations.

The Three Ds. Disability, death and divorce can wreak havoc on a family business. In a startup, there’s no room for the sudden disappearance, or alienation, of one of your key players. If you and your spouse are contemplating launching a business, ask yourselves truthfully, ‘How solid is our marriage? Can it withstand the strain associated with a startup?’ Matters of health, often overlooked in the optimism of the launch, can extract a toll, especially during the startup phase. If you are determined to go ahead with a family startup, don’t be reluctant to address the Three Ds upfront. Spell out what happens to ownership rights and management responsibilities in the event of one or more of the Three Ds. If family members are truly passionate about the business and want it to succeed and sustain the family for years to come, they will be okay with discussing these issues in order to protect the business from life’s unexpected twists and turns.

Communications breakdowns. We often underestimate how little we truly communicate with our family members despite the many words we may exchange with them on a regular basis. Poor communications often undermines family businesses. Old patterns of only hearing what someone wants to hear, or not speaking clearly to avoid hurting someone’s feelings, do a disservice to a startup. To address this, establish a regular meeting schedule that includes daily touch-downs with everyone, a weekly hour-long meeting that everyone will attend, and a monthly get-together where you have an agenda and get real feedback from everyone involved.

Interpersonal relations trumping the org chart. People bring two basic things to a job: their skill set, and their personality. In a family business, they bring a third element: their lifelong relationship with other family members. When it comes to defining roles and responsibilities in advance of launching a family business, the founders often assign roles based primarily on skill sets, ignoring the power balance between certain family members. You can’t force someone to take orders gracefully from a family member they have been bossing around their entire lives. This can lead to an almost immediate breakdown in the teamwork required to guide a business from startup to second stage.

What are your thoughts about mixing business with family? We’d love to hear them in the comments section below!

Dan Cook

Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

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