Tuesday, January 13, 2015

To Work with Family, or to Not Work with Family?

Working with family members can be a double-edged sword. It may seem easier to start a business with family members because you already know and trust them, but if things go awry, the disputes can be even more personal and intense. Think about it–if things go bad, instead of losing a business partner, you may ruin a relationship with your sibling, cousin, or in-laws. I’ve even seen situations where siblings sue each other and children sue their parents when the business isn’t as successful as planned. Family members shouldn’t have to turn to litigation to resolve their business disputes. So, what can you do to prevent the worst from happening?

Below are a few suggestions from Andreas Scott (a financial advisor at Total Wealth Advisors, LLC) and me regarding common issues faced by family businesses. Andreas has extensive experience in advising family businesses and his goal is to help his clients create and control their total wealth picture.  

Ownership vs. Management

Ownership and management are two different functions that are often lumped together. When including family members in your business, consider if they would be more effective as an employee, a member of management, a board member, and/or an owner of the company. Each of these roles provides the family member with different responsibilities and rights to the business. For instance, if you give the family member an equity interest in the company, consider if it should be a non-voting equity interest. This would give the family member the benefit of having economic rights, but prevent the individual from having governance rights. Also, if a management transition is necessary, we recommend having open conversations with family members to discuss your future involvement in the company and how that would impact their economic and governance rights and roles within the company.

Going External

A significant decision that many successful family businesses will face is whether to bring in external management. When a family business reaches the second, third, or fourth generation, there will be differing views on whether it is appropriate to bring in professional external management or to continue to keep all management within the family. It may be beneficial to have an independent party weigh in on important decisions, but it’s important to understand the implications of bringing in external management from an estate, wealth, and ownership standpoint.

Differences in Generational Views

It may seem obvious, but the first generation and the third generation will have different views of the family business. If left unaddressed, opposing views can cause significant tension within the family. If Grandpa doesn’t believe his grandson has the same respect for the business that he does, it could cause challenges not only at the dinner table, but also when it comes time to run the business and do the estate planning. To resolve these issues, it’s important to work with professionals (e.g., an attorney, accountant, wealth manager, etc.) who are both subject-matter specialists and who understand the underlying family dynamics.

Although it may seem easier to work with family members, remember to tread carefully because conflicts in the work place will inevitably follow you home.

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