You know what makes them tick, their strengths, and what holds them back. Going into business with family members has some advantages and some potential challenges. If you’re thinking about starting a family owned business, consider the following before jumping in:
Legal Paperwork to be Aware of
In addition to all the paperwork you’ll need to start, like licensure and tax forms, there are some important documents family businesses should consider to help keep a solid foundation.
A family business agreement can act as a guide and give you legal protection if anyone goes off course. Things like a general partnership agreement or limited partnership agreement will make your intentions and objectives clear.
A buy-sell agreement (or shareholder’s agreement) helps you plan for what happens to the business if a family member with equity in the business dies or becomes unable to work. It also controls how shareholders can transfer their stake in the business.
Much like a buy-sell agreement, a prenuptial agreement monitors the transfer of ownership, specifically in the event of a divorce. Without a prenuptial agreement, your spouse could be entitled to equity and even debt.
Creative Ways to Make Money
There are a lot of fun ways to start your family business. Maybe you’ve heard a neighbor swoon over a gift you made them? You could take advantage of online stores to sell homemade crafts. You can even help your kids make their own money.
There’s a lot of technical support that helps fuel your family business ideas to make it easier to connect with clients or customers, such as starting your own e-commerce site, computer design service or app development business. This could also limit the overhead of having a brick-and-mortar office location.
You could also leverage your specialties to start a consultancy service, whether it’s business coaching, social media management or network marketing. Not everyone in the family has to be a master at what you’re offering since you’ll need other talents like sales, accounting, project management, and customer service.
Options to Finance Your Business
If you need some capital to start your business, you have a few options to consider:
Funding yourself might be the easiest way to get your business off the ground for those that have the means. Using your savings or selling assets to finance your business can help you avoid debt and keep ownership. Keep in mind that you also take on all the risk.
Small Business Loan
A common way to fund a family business is a small business loan. Banks generally understand higher risk is involved for smaller businesses with little credit history or collateral. Do your research before applying for a loan as rates and terms can vary.
Whether they’re angel investors, private equity firms or venture capitalists, investors can bring capital along with valuable contacts and experience. However, using outside investors may mean that you have to forfeit part ownership of your company.
This is a growing option for financing ideas if your idea grabs the interest of the masses. There may be some regulations depending on how you set up the fund, so be sure to read the fine print or check with a legal advisor. You’re also putting your product or service out in the open, so you may want to consider legal protection and make sure you’re ready for the public arena.
Starting your own business as a family can be an exciting task, but it’s important to do your due diligence before starting any business. Here’s some considerations specific to family-owned businesses:
Benefits of Family Businesses
There’s potential advantages of going into business with family:
- Shared values - family members will likely have a lot of the same moral beliefs from growing up together, which can help create and foster a shared vision throughout your endeavor.
- Commitment - you’re all in it together, so there may be more ownership and accountability.
- Loyalty - a natural allegiance to family means the business might be a priority in everybody’s lives.
- Flexibility - small businesses require that each person wears different hats and share responsibilities.
- Stability - successful family businesses can last generations, limiting turnover in leadership and helping to maintain long-term goals.
Disadvantages of Family Business
Like anything else, there could be some disadvantages to starting a business with family members. Here are some things to consider before getting started:
- Lack of skills or experience - each person may not have all the skills necessary to make the business a success. It’s important to divvy up roles and responsibilities catered to individual talents.
- Family conflict - if family members are at odds, it can feel more personal and spill into personal lives.
- Favoritism - treating family different than employees can create jealousy or ill feeling, ultimately leading to dysfunction.
- Succession planning - power struggles during leadership changes can be straining when making sure the interests of the business are maintained.