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Getting family involved int the business – From our June 2018 Newsletter
Getting family involved in the business
We are often asked for guidance from clients if it is a good idea to have family members involved in their business, particularly in the early stages and on start up.
Usually the issues involve areas such as receiving financial assistance and/or backroom work such as hands on advice, helping with staffing, getting involved with the accounting or offering expertise. There is no single answer to these questions
1] On the question of finances, we try to understand what is being offered. Is it an offer of an outright gift? Is it a loan and if so what are the terms? Is it provided on the basis of ‘pay us back when you can ‘, is the lender able to afford the loan/gift and what would the consequence be if it cannot be repaid? As you would understand, borrowing from family can be an immediate source of funds but it also can be highly problematic if the business venture does not succeed as planned or within the time frame that may have initially been expected. The ‘bank of Mom or Dad’ can be an attractive source of funds but great care should be taken to understand the potential tensions such transactions cause. A proper loan agreement with proscribed interest and repayment terms would be preferable along with a very candid discussion of the risks such investments may carry. We also counsel that one should seldom if ever offer equity in these areas. Having family investors is very risky and difficult but having family as minority shareholders can be worse.
2] The backroom work often involves some accounting or bookkeeping assistance or help with social media, marketing, or dealing with paperwork or telephones or email. Such assistance is very helpful but one must ask if the person will expect to be compensated, whether the business needs or can afford the help, and candidly, what is the risk that the work being performed might be unsatisfactory. Terminating the services of good friends or relatives, particularly the spouse or parent, may not only be very difficult but could threaten the success of the business and the health of the business owner. Having unpaid volunteers can be helpful at the very beginning of an enterprise but should not be sustained over an extended period of time. Just a note, all the above issues are difficult whether the relative is paid or not.
3] Offering advice is a strong element of anyone’s relationship. It is usually very well intended and offered with sincerity and goodwill. The key is whether the advice is based on any experience or knowledge and whether the person offering it is providing suggestions or almost direct orders as to what you should do. In the latter case, this is your venture and only you must decide on the course of action that best suits your style and objectives. Suffice it to say this is an area where your judgement will be paramount. Advice is often freely given; you alone must evaluate its relevance and value. The element of insulting a relative may come into play that may ruin a personal relationship because of this business involvement.
In summary, we cannot offer black and white guidance on this issue. We can only offer care, candor and consideration of alternatives. It is a complex area and one where we are accustomed to providing guidance and direction on an individual basis. But…before venturing in lightly to these endeavors, consider very carefully the dynamics and the very long term results of such a relationship; once started, may be very difficult to end on many levels.
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