While there are a few functioning family dynasties (Vanderbilt, Walton, Mars, Koch) worth centi-billions, there are risks of doing business with family that should not be overlooked.
I believe that a good argument considers both sides of the spectrum, so let’s start with the benefits of working with family and friends because there are in fact some:
- Collaboration is much more fluid
- Mindsets & goals are usually aligned
- More relaxed and comfortable environment
- Financially, there are tax advantages, and the whole family benefits together
Starting a business with friends or family may seem advantageous at first but eventually, emotion gets in the way and becomes a large impediment to the success of the business. This often ends up sabotaging the company and your family’s relationship.
Let’s use your own family as an example. Have you ever been jealous of your brother or sister? If you’re an only child, have you ever been jealous of your friend? Do you argue often, and if so are they sometimes over insignificant issues? What happens when a family member starts slacking and continually fails to produce results? How will they react when you need to fire them? How will you react?
We often want to work with friends and family because we know them well, we trust them, and are comfortable with them. We also want to succeed with them; it’s all well-intentioned. But when things go south (which they inevitably will at some point in the journey of any business), dealing with friends and family can get very sensitive very quickly. We see it every day in family businesses.
I personally know of family businesses where a family member has acted with entitlement and another situation where a member has stolen from the business. In these situations, you need to choose to either act as a fiduciary to the business (which as an owner you are obligated to) and enforce disciplinary actions to all or protect your relationship with the underperforming family member and ignore their slips.
The point in time to be the most careful about doing business with friends or family is when you are just starting out. This is a critical point in time when you don’t have a lot of money or resources to give away. The majority of the time when a friend or family member wants to support your business, they ask for a discount or a free sample of your product or service. When you’re starting out, you absolutely need positive cash flow for the business, not only to survive but to grow to a more sustainable setting.
As a business owner, it’s your fiduciary duty to serve your investors and your customers. In order to do that, you must make tough decisions that are in the best interest of your company. Doing that with family or friends in the mix becomes very tricky if everyone isn’t on the same page. For a family business to work, everyone must sacrifice all ego and entitlement to always do what’s in the best interest of the business. This is more difficult than it sounds and doesn’t work out very often.