At its core, a family business is exactly what it sounds like: a company or other enterprise owned, operated, and actively managed by at least two people from the same family. This can be a parent and their kids, two siblings, or some other configuration — it doesn't actually matter, as the management is made up of people with some type of similar close relation.
According to one recent study, family businesses make up between 80% and 90% of all business enterprises in North America. They contribute approximately 64% to the gross domestic product of this country, equaling roughly $5 trillion every year. Not only that, but they also comprise around 60% of the workforce — making their contribution every bit as significant as it is comprehensive.
Having said that, as is true with so many other types of businesses, simply beginning an enterprise with someone you trust isn't nearly enough to guarantee success. Family organizations often fail the same as others do, and if you truly want to make sure that yours gets off on the right foot, there are a few key things to keep in mind.
Building a Family Business: An Overview
By far, the biggest thing to understand about running a successful family business is that not every family member necessarily has a place in the proceedings.
Indeed, experts agree that this is one of the major traps that most new entrepreneurs, in particular, tend to fall into — a deeply-rooted obligation that kids or other relatives "need" to join the company. The issue is that while this is a kind gesture, it could also create a situation where people with authority aren't invested in being there.
For parents trying to bring their kids into the business, it's far more beneficial to create a situation where they feel free to join the organization should they so choose. It shouldn't feel like an obligation to them, as that will only cause problems later on.
Along the same lines, not every family member is necessarily qualified for this level of responsibility — a similar issue that causes problems from a different perspective. Experience still needs to be the driving force behind what role someone will be given in an organization if any. There's no sense in bringing someone with no experience into an industry and elevating them to a position of authority simply out of some sense of obligation that "there is always a place for you here." Doing so isn't just doing them a disservice — it also dramatically increases the chances that the business will ultimately fail.
Another major pitfall that many family businesses fall into is where the organization simply cannot grow fast enough to support everyone at the same time. If one were to start a business and immediately give their four kids management-level positions, especially in those early days, there might not be enough work to go around. There certainly may not be revenue to support those salaries, either.
Instead, all family businesses need to be created in a strategic way that allows them to grow and scale over time — only bringing new members into the fold when the time is right. And putting them into positions that play to their strengths and talents. As the organization gets larger, there may be enough revenue and work to support additional family members — and only then should new entries be considered.
Beyond that, there are several essential best practices to lean into that can help increase the chances of success for any family business. Communicating openly and often with all parties is critical, especially in making sure that everyone is always on the same page and moving in the right direction. Family members need to be kept abreast of major decisions regarding the company's trajectory and the reality of competitive challenges.
Similarly, it's always important to solidify the values of the family — and thus the business — as early on in this process as possible. Before you even begin to think about a direction for the business, consider how this path might impact the family. If everything is overwhelmingly successful, what will that look like? What does each participating family member see happening in five or even ten years — from their point of view and in the overarching sense of the company? What does the organization stand for, what entity is best for succession and taxes, who is it dedicating itself to serving, and does everyone agree on these things?
The answers to these questions need to impact many of the decisions that one will make moving forward. Exploring the holistic context that your business and family exist within, is extremely important, but almost universally overlooked.
In the end, if you're going to be starting a family business in a leadership position, you also need to respect everyone involved. Remember that just because they're relatives doesn't mean that they cannot bring fair value to the table. They're not there to simply take orders — they're there to offer a unique perspective that you might not have access to through other means. If one or more of your children don't want to join the family business, that's okay — but the qualified ones who do should be given the room they need to perform to the best of their abilities.
Sometimes that means allowing them to give their objective, third-party opinions — even when they don't necessarily align with your own. Sometimes it means them taking a role in the company that you didn't necessarily see for them, so long as it is one that they excel at.
Following these best practices means that you'll end up with something more effective than a traditional family business. You'll have a true legacy that has the potential to last several generations — which in and of itself is the most important benefit of all.
Feel free to reach out with any questions or concerns in running and managing your family business or farm.If your tax pro or bookkeeper isn’t open to these conversations, it’s time to find a new trusted partner. Finances don’t exist in a vacuum, and professionals and business owners need to adapt to the complicated landscape we live in.
As always folks, this post is educational and informational only. Don’t take advice from the internet. Ask your own tax pro or financial advisor for specific information about your situation.