Running a family business is a point of pride for many families—but it’s also a major accomplishment. According to the Family Business Institute, only about 30% of family-owned businesses survive into the second generation, 12% into the third generation and 3% into the fourth generation.1
There are many reasons that family businesses fail, but a big one is lack of planning. Families that want to build a successful, lasting enterprise need to carefully prepare for the future. So, what are the secrets to success?
1. Formalize the arrangement
A common issue with family-owned businesses is that the owners treat the business too casually and don’t institute the same legal agreements and protections common among non-family-owned operations. Whether run by spouses, siblings, or multiple generations, it’s critical that the partners clearly lay out the ownership structure, the responsibilities of each owner—and the consequences if one family member doesn’t fulfill their end of the agreement.
For example, family owners will generally want to have a partnership or operating agreement. This document can detail everything from each partner’s role and responsibilities and expected work schedule to his or her annual salary and dividend payout from the business. A buy-sell agreement can protect the business if one partner wants out or to sell the company.
Having legally binding agreements in place ensures the business won’t be derailed by one irresponsible family member or unexpected event, such as divorce or death. It forces family owners to talk through potential prickly situations in advance and take steps to ensure the business stays strong.
2. Choose the right structure
Families also need to make sure they establish the right business structure based on their needs. A limited liability company (LLC) or S corporation can be a good choice for family-owned businesses because they provide liability protection without some of the complicated formalities of establishing a corporation. A business lawyer can consult the business on which structure makes the most sense.
3. Keep business and personal finances strictly apart
Due to their close relations, family-owned business partners may not think twice about tapping the coffers of the business when they need to borrow money or funneling some of their personal money into the business when they have the cash to spare. But this can lead to serious problems. For one, under an LLC structure, owners are required to keep business and personal finances separate if they want to ensure the LLC’s liability protections hold up in court.
But using the business like a piggy bank will surely cause strained relationships between the partners and may compromise the success of the business. Family business partners will want to keep strictly separate personal and business bank accounts, as well as separate accounting and recordkeeping.
4. Separate work time from family time
It’s common among family businesses to let business talk spill over into the dinner hour or even at family gatherings. That’s usually not a good idea. To maintain positive relations, families need to enjoy family time together without letting the business partnership seep into every hour of the day.
The most successful family business owners designate specific times when talking about the business is forbidden—whether every Sunday or at all holiday gatherings.
Building a family-owned business that can withstand the years, if not the generations, takes some thorough planning and structure. Planning not only helps the business stay strong, but family relations, too.
1 – Family Business Institute, http://www.familybusinessinstitute.com/index.php/Succession-Planning/
The views expressed in this articles are those of the writer, and do not necessarily represent the views of First Republic Bank.