At its core, a family business is exactly what it sounds like: a company or other enterprise owned, operated, and actively managed by at least two people from the same family. This can be a parent and their kids, two siblings, or some other configuration — it doesn't actually matter, as the management is made up of people with some type of similar close relation.
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According to one recent study, family businesses make up between 80% and 90% of all business enterprises in North America. They contribute approximately 64% to the gross domestic product of this country, equaling roughly $5 trillion every year. Not only that, but they also comprise around 60% of the workforce — making their contribution every bit as significant as it is comprehensive.
Having said that, as is true with so many other types of businesses, simply beginning an enterprise with someone you trust isn't nearly enough to guarantee success. Family organizations often fail the same as others do, and if you truly want to make sure that yours gets off on the right foot, there are a few key things to keep in mind.
Building a Family Business: An Overview
By far, the biggest thing to understand about running a successful family business is that not every family member necessarily has a place in the proceedings.
Indeed, experts agree that this is one of the major traps that most new entrepreneurs, in particular, tend to fall into — a deeply-rooted obligation that kids or other relatives "need" to join the company. The issue is that while this is a kind gesture, it could also create a situation where people with authority aren't invested in being there.
See this related post from Desirae Haluk, Bertha Robinson, and Vipin Singh: Characteristics of a Healthy Business
In thinking of having a healthy business, the first thing to do is have a plan. Having a plan as to assessing where you are and where you want to go is critical. How do I make that pivot and shift? What is the strategy and where do I want to go? Be clear on where you are now and what you want to do. Have an idea of what is a clear goal structure.
For parents trying to bring their kids into the business, it's far more beneficial to create a situation where they feel free to join the organization should they so choose. It shouldn't feel like an obligation to them, as that will only cause problems later on.
Along the same lines, not every family member is necessarily qualified for this level of responsibility — a similar issue that causes problems from a different perspective. Experience still needs to be the driving force behind what role someone will be given in an organization if any. There's no sense in bringing someone with no experience into an industry and elevating them to a position of authority simply out of some sense of obligation that "there is always a place for you here." Doing so isn't just doing them a disservice — it also dramatically increases the chances that the business will ultimately fail.
Another major pitfall that many family businesses fall into is where the organization simply cannot grow fast enough to support everyone at the same time. If one were to start a business and immediately give their four kids management-level positions, especially in those early days, there might not be enough work to go around. There certainly may not be revenue to support those salaries, either.
Instead, all family businesses need to be created in a strategic way that allows them to grow and scale over time — only bringing new members into the fold when the time is right. As the organization gets larger, there may be enough revenue and work to support additional family members — and only then should new entries be considered.
Beyond that, there are several essential best practices to lean into that can help increase the chances of success for any family business. Communicating openly and often with all parties is critical, especially in making sure that everyone is always on the same page and moving in the right direction. Family members need to be kept abreast of major decisions regarding the company's trajectory and the reality of competitive challenges.
See this related post from Desirae Haluk: Creating a Marketing Strategy For Small Businesses and Start-ups
It is very crucial for a business to create goals and come up with a suitable strategic marketing plan. But do not worry as we are here to help you come up with an actual marketing plan that can actually produce good customer retention and that will help you achieve your product/market growth.
Similarly, it's always important to solidify the values of the family — and thus the business — as early on in this process as possible. Before you even begin to think about a direction for the business, consider how this path might impact the family. If everything is overwhelmingly successful, what will that look like? What does each participating family member see happening in five or even ten years — from their point of view and in the overarching sense of the company? What does the organization stand for, what entity is best for succession and taxes, who is it dedicating itself to serving, and does everyone agree on these things?
The answers to these questions need to impact many of the decisions that one will make moving forward.
In the end, if you're going to be starting a family business in a leadership position, you also need to respect everyone involved. Remember that just because they're relatives doesn't mean that they cannot bring fair value to the table. They're not there to simply take orders — they're there to offer a unique perspective that you might not have access to through other means. If one or more of your children don't want to join the family business, that's okay — but the qualified ones who do should be given the room they need to perform to the best of their abilities.
See this related post from Anthony Guzman: What Can Business Insurance Do To Help A Business?
USI is unique in these factors. We take a lot of the mid-market and the analytical data resources, and we bring it down to the small commercial. The mom-and-pop and the smaller businesses can take advantage of some of the larger corporations only have access to. It’s a great way to give business owners a look into the risk in a more complex and mature way instead of looking at insurance as a commodity or just an obligation. You really can use it as access for your business and for your future. Your business relies on insurance and it keeps you afloat.
Sometimes that means allowing them to give their objective, third-party opinions — even when they don't necessarily align with your own. Sometimes it means them taking a role in the company that you didn't necessarily see for them, so long as it is one that they excel at.
Following these best practices means that you'll end up with something more effective than a traditional family business. You'll have a true legacy that has the potential to last several generations — which in and of itself is the most important benefit of all.
Feel free to reach out with any questions or concerns in running and managing your family business. If you are thinking of succession or possible sale, it takes careful planning way in advance. Feel free to contact our office at 551-249-1040 to talk things over.
Do you need more information? You can reach out to Dennis Harabin at Relax Tax today!
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