As an owner of a family owned business, you know better than anyone how valuable your time is, and how sacrifices have to be made to keep the family owned business running and to keep your sanity. But are you aware that there are four extremely harmful mistakes commonly made by family owned businesses that can mean the demise of the business?
1. Mixing Family and Business Finances
As many family owned businesses start out as hobbies or side jobs that turn profitable, separating out the business finances are not always first priority when creating a business strategy plan.
However, it should be. Without the separation of business finances from that of the family and the protection of a formal legal entity such as a limited liability company or a corporation, your family members could become liable if something goes wrong.
It can also mean legal nightmares down the road should your family owned business ever wind up in court with a customer or vendor who did you wrong. No one ever wants to think that will happen, but trust me, better safe than sorry.
2. Employment Agreements – Yes, For Family Members
Another thing you may not want to think about, but you must. What happens when your brother skips out early a few too many afternoons a week to go golfing or your daughter thinks being a part of a family owned business means deep discounts for her and all her friends too? These are not easy issues to address at any time, but they can become extremely awkward if the problems are allowed to persist after never having been addressed in the first place.
It is best to make all expectations of your family owned business team clear from the start. Make sure these agreements are in writing and include all aspects of employment and operations. Take it further and plan ahead for dissolution of the company – how will it be handled if only one person wants to exit or 50% want to sell but the other 50% do not? Although things may change from the point the business is started until the time comes for a business exit plan, having an idea of everyone’s expectations and long term strategy planning is vital in avoiding an awkward family feud at a later date due to a conversation that was never held.
Depending on the type of family owned business you are running, most companies are required to obtain local, state or federal licenses. If you allow customers into your office or home, you may even need zoning permits and variances. While it is fairly simple to obtain information about what is required for your business – a trip to your city hall or county office should do it – the repercussions for failing to obtain these licenses can be severe. Is it worth your family owned business being shut down and ending up with a damaged reputation? Even just the time and money you will lose having to deal with fines, fees and lost business should be enough for you to make sure to have these licenses in place.
Lastly, but perhaps most importantly…
4. Succession Plan aka Exit Plan Strategy
In a survey conducted by LegalZoom, 75% of small business owners said they do not have an exit strategy plan in place. You may not enjoy thinking about it now, but what is going to happen if you are hurt or pass away? You are going to need a strategy plan in place in the case that something unexpected happens and there is a need for temporary or permanent leadership.
What is the long term plan for your family owned business, do you have one? You may want to keep it in the family, may want to sell the business, perhaps you are not sure at this point. One thing should be certain, that you want your business to be successful no matter what comes along down the road. When the time does come for an exit, and it will, you will want to have an exit strategy plan in place. Even if you are exiting and leaving the business to a family member, this should still be a requirement for the business and is necessary for a successful transition.