Wednesday, July 27, 2011

Starting Your Small Business - Advantages and Disadvantages of Family Business



Here we shall discuss the different advantages and disadvantages of starting a family business.


When Family Members are Employees

When business owners look for help, they frequently look first to members of their own family. This approach yields several benefits. It keeps money in the family. The owner can transfer money to family members and claim the transfer as a deduction for income tax purposes. Further, these related employees can probably be available for as much or as little time as required. Unfortunately, relatives do not always make the best employees. They may lack the requisite skills and interest to perform required tasks.

When Family Members are Owners

Family businesses are not a new phenomenon. The very first small businesses, in pre-Industrial times, were small agricultural or craft-type concerns, in which family members were active workers. At that time, the businesses were owned and operated by the husband or father with all other family members simply doing what they were told.

As a result of the changes that have taken place over the past few hundred years, today’s family businesses have evolved far beyond the early agricultural and craft-based models. Today’s family businesses tend to be more cooperative and less dictatorial, with family members playing more active roles in the ownership and operation.

Assuming that family members have the requisite interest and skills, there are sound reasons for operating a family business. Firstly, there is an existing bond among family members that could facilitate their working together in pursuit of a common mutually beneficial goal. It is often difficult to have employees commit to specific business goals. Provided family members can agree on what they want the business to achieve, it should be fairly easy for them to commit to achieving these goals.

Secondly, family businesses make it possible to keep things in the family. Obviously, profits that are shared among family members, rather than among non family owners, will yield more income to the family. Family members might also be better at keeping secrets and maintaining confidentiality than nonfamily employees.

It is often difficult for business owners to share control with others. Fiercely independent, they sometimes find it difficult to share or delegate responsibility for making things happen and for keeping things going. In family businesses, with control shared among family members, owners do not really feel that they are giving up control.

A major benefit of family businesses is the simplification of succession planning. For small business purposes, succession planning is all about planning who will operate the business when the current owner retires or, due to poor health, cannot continue to run it. With family members actively involved in running the business, it should be a relatively smooth transition from one family owner to the next. This will benefit owners, customers, suppliers, and non family employees. Being familiar with how the business is run, relatives are unlikely to introduce disruptive practices when they assume responsibility for operating the family business.

There are also sound reasons for not starting a family business. If one or more family members has no interest in participating in the business or lacks the appropriate skills to make a worthwhile contribution, no one will benefit from this family participation.

Don’t assume that just because you are very excited about your business that your family will share this excitement. Before counting on family members’ participation in the business, make sure that they are genuinely interested and can make valuable contributions.

Also, when family members work together, there is a tendency for domestic issues to spill over into the work situation and vice versa. One of the good things about working away from home is that it helps separate home and family. If, for example, you have a dispute with your spouse or partner over something as trivial as leaving the top off the toothpaste tube, a day apart will help both of you forget about the issue. On the other hand, if you spend the day together working, the normal pressures of running a business can help escalate a nonissue into a disagreement. Ordinarily minor work annoyances, such as the printer cartridge running out of ink, can ignite into a major conflict that would otherwise have been ignored and forgotten. Domestic differences and business problems can be a very toxic combination.

Another area of concern is the difference in our relationships with family and co-workers or employees. Some people treat their family with more respect than they do co-workers. Conversely, co-workers may see the agreeable people-pleasing sides of our personalities while we reserve our ugliness and nastiness for family viewing only. This can be problematic if family members believe that employees receive more favored treatment or if employees perceive that relatives are being treated better than they are. Realistically, it is difficult to treat family members—whether owners or employees—the same as nonfamily employees.

And lastly,  perhaps one of the biggest difficulties with involving family members in the business is the risk associated with putting all of your eggs in one basket. When there are serious cash flow problems, owners frequently cut back on the money that they and their family members take from the business. When this happens, the family income will be severely restricted, even temporarily suspended. If, however, family income comes from sources unrelated to the business, the consequences of a business cash flow problem will be minimized.

That pretty much covers up all you need to know and understand in the advantages and disadvantages of a family business. More info on your starting up a business here.

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  3. Thank you for sharing. Family business succession planning is probably the most difficult and complex process a family enterprise will face. Transitioning a business from one generation to the next requires much thought, trust and planning.

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