Common Mistakes Family-Owned Businesses Make

Not Setting up a Clear Hierarchy

Who is the boss? If everyone in the business has ideas and wants to be in charge, it can quickly devolve into chaos. Setting up a structure that makes sense can help you avoid many of the most common sources of conflict experienced by family-run businesses. It can be difficult to assign roles to family members, particularly if those roles disrupt your relationships or can potentially cause strife. If you are used to being the head of the household but end up being a regular employee at the family business instead of running the company, you may object to your place in a formal hierarchy. Squabbles over who should be responsible for what part of the business can derail your plans before you get up and running, and if you do not establish these roles swiftly, you could be in for trouble later.

It is tempting to keep things informal, but everyone within your business needs to know exactly what they are responsible for and where they fall in the business hierarchy. Failing to define the roles when the business is small could make things more difficult for your family as the business grows. Establishing key roles and responsibilities right from the start can help you get organized and avoid disruption as your business scales up. If you have been operating without clearly defined responsibilities, you may not be running as efficiently as you could be.

Taking the time to have the conversation about roles, responsibilities, and best fit might be uncomfortable in the short term, but it will benefit your business in the end, particularly if you continue to grow and thrive.

Mixing up Business and Personal Finances

Since many family businesses start small—as in running the business from home or out of the garage—it is easy to forget to separate your personal finances from your business finances. While it will not make an enormous difference for you from the beginning, it can swiftly become problematic and even put your personal assets at risk. Mitigate this risk from the start by making sure you set up your business account and finances separately from your personal account. Doing this from the beginning will ensure you do not encounter problems later.

Not having a clear structure for your income and expenses will result in a nightmare at tax time and make it more difficult to determine how much money is coming in and where that money is flowing out. From business owners who take whatever salary they feel like they need at any given time, to those who randomly pump cash into the business whenever it is needed, using personal finances to support your business can backfire.

Forcing Kids to Participate

You might be very enthusiastic about your business and assume that everyone else in the family is excited too. Conscripting family members and roping them into the business may help you get up and running in the short term but will not do you much good in the long run. Teens, young adults, and even adults who feel forced to participate could rebel or turn in a less-than-stellar performance simply because they do not share your enthusiasm for the project.

Not every family member will share your level of interest, so adding them to the business before you ask them about it could end up in disaster. Ideally, every employee you hire will have enthusiasm for your business, your customers, and your goals; a family member that is not fully on board will not be a blessing to your business. Your adult or teen kids that truly want to benefit your business can be true assets and can even help you identify the leaders of your business for the years to come.

Overlooking Other Possibilities

Being a family member should not automatically place someone in a leadership role, particularly if they are not well suited for it. If you have non-family employees that have enthusiasm for your business and who want to succeed but you promote the interests of family members just because of the existing relationship, you could do more harm than good. You could even drive away a great employee if you have a clear and unreasonable preference for a family member when they are not really ready for that role. Understanding that your family business will eventually need employees that are not relatives will help you get past the common issue, even if you started out with all family members. If you need a specialist or someone with specific skills, from bookkeeping to selling, you may have to look outside of the family to find the skill set you need.

Failing to Have a Succession Plan

What happens to the family business when you (or another key family member) retires? What if someone wants to try something new? Failing to have a plan for succession could backfire on you if you are all on the same page now. Planning on how the business will run when you are not there, including plans for your own retirement or even illness, will ensure that your business is protected. If you wait until you are not well or until you are ready to move on and do not consider the future, you could end up stuck without an exit strategy or a way to move on.

It can be uncomfortable to talk about, but taking the time to have an estate plan for your business ensures every key member of your team and family knows what to expect. It also gives you a chance to resolve any conflict and gather input from all family members and create a strategic plan for moving forward.

Letting Family Conflicts Become Business Conflicts

It is typical to have some family conflict—over politics, relationships, past history, and personality differences—but letting these spill over into your business can turn your successful business into a nightmare. Keeping personal conflict separate and resolving any issues that could effect your business will ensure you are truly able to focus on your business and the work at hand.

Skipping Important Essentials

If you have employees that are also family members, you still need to:

• withhold taxes,
• provide them with real paychecks, and
• cover them with any insurance or protections required by law.

You should also maintain the same type of employee documentation required for all of your non-family-member employees, too. Anyone employed by your business needs to be treated in the same way, so you cannot take shortcuts or skip steps just because someone is a family member.

Failing to Motivate All Employees

Treating both family and non-family employees the same also means you should work to make sure that all employees are motivated to succeed. If your non-family employees think that you only promote family members, you may not get true buy-in or loyalty to your business. Make it a point to motivate both family members and non-family members of staff.

Hiring Unqualified Employees because They are Family

If the key qualification and consideration you have when you hire an employee is how you are related, you may not end up with the best performers in your most important roles. Pressure from other family members to hire your cousin, sibling, or other relative can result in you ending up with a less-than-stellar employee who is simply not employable elsewhere.

While being inclusive is wonderful, your business should not be a clearinghouse for your extended family’s unemployable members. Only hire those who have the skills you need and who are interested and ready to get to work for your business; otherwise you will end up with low-quality, highly paid employees you feel too guilty to get rid of. Do not be afraid to decline to hire a family member or end an employee relationship that is not working out.

Not Stepping Aside When You Need to

Just because you formed a business or were there from the start does not mean that you have to stick with the business forever. It could be time to step aside if you are thinking about the following issues:

• It is holding you back from other things.
• It is interfering with your ability to move along.
• It is preventing you from having a family, going to school, or even forming new relationships.

You should be involved in a business you are enthusiastic about and that you truly love. If you are no longer interested or feel like you are ready to move on, it may be time to let go. It is very easy to move on from a business you are not related to, but it can be more stressful to leave a family business.

Failing to Protect Your Business Legally

Family businesses need to choose a legal structure that works for all responsible parties. Forming a corporation is often the best way to ensure that all parties are protected and that your business is set up in a way that mitigates risk and ensures that you and your family members are not risking your homes, assets, and personal finances. There are other business structures that could work, so exploring all of your legal options is essential and can help you protect yourself and your family from being held liable for any problems the business has.

Your family-run business can be rewarding and wonderful. Learning about the most common mistakes that family-owned businesses make can help you avoid some of these troubling situations. Simply being prepared to correct any of these common issues now can help you avoid trouble and conflict in the future and allow you to focus on your thriving business.

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