Points to ponder when starting a family business
During a recent interview with a satellite radio station , I was asked to comment on the challenges facing family-owned businesses . Much of the pitfalls faced by these business stem from the inception .
Whether it is a new venture or the expansion of an existing one , the most important point is that the business should be treated as a distinctly separate and independent entity from the family unit . A greater stress is placed on the relationship of the family business partners due to the family bond as issues that have caused friction in the business environment spill over into the family unit and can lead to degeneration of the of the family relationship. The following points are guidelines to help you navigate through some of the issues .
1. A formal family business meeting must be held to develop a business strategy and a solid business plan. If the business is already running, a processes for entry, exit, hiring and firing must be established.
2.With a new venture, it is vital to establish a pecking order. Will all decisions be made jointly, or will day-to-day decisions be left to one individual. Establish who will be the managing director and what role other family members will play.
3. It is important that reporting relationships are clearly defined. If members operate independently, then the business could be pulled apart by bad decisions, lack of cohesiveness and financial mayhem.
4. Individual family members must communicate openly and honestly about the business.
5. Clear job descriptions should be set out. Work times, remuneration, perks holidays, and medical expenses for each family member involved in the business should be discussed thoroughly.
6. The tendency in family-owned businesses is to skimp on remuneration. The principle shareholder may believe that if they offer a family member a stake, then they should take less than market value for their services. which is the wrong attitude to adopt. The shares in a private enterprise are rarely worth anything on a secondary market, especially if the business is service orientated. The only time this may work is if they can share in year-end profits.
7. The prospect of joining a family member in business can be exciting but the enthusiasm soon fades when the new addition thinks that they can sit back and reap the (imaginary) rewards of self-employment. Many first-time entrepreneurs get a huge wake-up call when they realise that eight hour days and lazy weekends are a thing of the past. Family members must be willing and able to shoulder the extra responsibilities of being self-employed.
8. Develop a formal process to resolve conflicts. It is important to remember that the family interacts socially as well as in business. If there is a conflict it must be resolved at work and not within the social interaction
9. Set aside some time to hold formal business meetings on a regular basis to resolve issues.
10. Have a contingency plan if the relationship fails. If a family member just cannot cope, agree to a period during which they will be paid while seeking alternative employment. If there has been an injection of cash by the exiting family member, agree up front how that money will be paid back in the event of a break-up. You may love your Uncle dearly, but if you see him as a threat to your business, those warm fuzzy feelings soon dissipate. If you realise that you have made a mistake, cut your losses early in order to keep your personal relationship in tact.
Ebrahim Patel is a Director of Magellan Investment Management and a Business Consultant .
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