Client Update: These 5 Common Mistakes Could Doom Your Family Business

As appealing as working alongside your family members might be, there are some major pitfalls to avoid.

By: Patricia E. Farrell

Some might call owning a family business “the best of both worlds.” You’re working with the people you love, creating wealth and a legacy that can be passed down for generations.

It also comes with some big potential pitfalls to avoid.

As appealing as a non-corporate, family-oriented environment is, these types of businesses are vulnerable to special weaknesses that can sink the entire enterprise. In that scenario, not only does it put the family at risk of financial ruin, but personal relationships can be irreparably shattered. Family businesses that fail typically run into one or more of the following common mistakes.

Mistake No. 1: Guaranteed jobs for family

Obviously, some the most appealing parts of starting a family business is working alongside family members and creating job security for your children or siblings. But not only do some owners hire family members, they place them in positions of leadership, even if they aren’t necessarily qualified. This might cause friction with other employees and family members, and the unqualified manager might be unhappy, too. It all weakens the company.

Mistake No. 2: Appointing only family to the board

Many owners keep control of the business by allowing only family members or close friends to sit on the board of directors. Such familiarity among the decision makers can, unfortunately, let personal issues seep into the business. A sister might be offended by the lack of a salary raise, or a son might have hard feelings after a denied promotion. Normally, hurt feelings don’t play a role in board decisions, but they may with an all-family one.

Mistake No. 3: Making non-family employees feel like outsiders

Unrelated employees can feel left out or resentful of a family-centered company culture, especially if they’re picking up the slack for an underperforming family member or miss out on a promotion to their boss’ child. Even if the perception of nepotism is misplaced, family businesses face it frequently.

Mistake No. 4: Overreliance on the family leader

A founding parent or eldest sibling often serves as the glue holding together a family and its business. Unfortunately, injury, illness or a personal decision may mean the family leader isn’t always there to run the show. If the rest of the family is unprepared, the health of the business and, consequently, the family’s finances becomes threatened.

Mistake No. 5: Skipping formality

Family businesses can be relaxed on the rules: Big decisions made at the dinner table, coat and tie hanging in the closet and few written records of conversations. But a lack of formal procedures can lead to a mess if, say, the company can’t cover payroll because of a loan made to dad, or if mom privately promised a job to her daughter’s fiancé.

Despite these potential problems, family-owned businesses have the capacity to do great things for families and the communities they serve. The trick is learning from others’ mistakes.

Want some best practices for running a family business, or some quick fixes for the mistakes discussed above? Contact Patricia Farrell or any other Meyer, Unkovic & Scott Corporate and Business Law Group attorney with whom you have worked. Links to contact information are included below.

This material is for informational purposes only.  It is not and should not be solely relied on as legal advice in dealing with any specific situation.