Doing Business with Family and Friends

January 5, 2017 Ryan Perrone No comments exist

family-org-chart

There have been many articles written about the pros and cons of doing business with family and friends.  One of the most important things people should consider before entering into a business arrangement with friends or family is what will they do if they find themselves having to make a choice between friendship / family or the business.  In other words, are you willing to make the same decision as you would if it was a standard employee or generic vendor?

 

Family Members are Difficult to Fire

I have only seen one instance where an owner, who hired his son to manage the company’s top customer, was over-the-top explicit that the son would be fired if he screwed it up (he didn’t).  While many family members know they have to pull their weight in the business, there is usually more leeway given.  In many situations, if a family member is not successful in a certain position, they are moved into another job in order to keep them employed (thus avoiding a potentially difficult decision).  While it might seem easier to put up with a sub-par employee than to deal with the fallout from the family, imagine that this was their first job.  Fast forward a few decades, and as they get closer to retirement, now you are really stuck with them.  Think long and hard if you can stand to deal with that day in and day out.

 

In general, if employees are allowed to make mistakes and not face the same consequences as others, they will lack the incentive to become better employees and may likely cut corners more often in the future.  This can cause resentment with the rest of the team, and the individual will be viewed as getting a paycheck because of their last name.  So not only do you have a bad employee, they can become a cancer in the organization.

 

The most complicated situation I have ever witnessed was the company that had 3 different families involved in the ownership and management.  There was a scorekeeping mechanism where each family had equal representation, and if headcount needed to be trimmed, each family had to share in the pain equally.  It is also the only company I have ever seen where a forklift driver made $90,000 per year.

 

Succession Planning

Transitioning management from one generation to the next presents all sorts of issues.  First of all, there needs to be alignment with both desire and capability.  A founder may want one or more of their children to take the reins, but the next generation also has to want it.  Even with the desire to run the family business, it is equally important that the new heir is competent enough to do the job.  If there are multiple siblings involved, there can be a desire to have co-presidents.  It typically works best to have one pilot.

 

Assuming there is alignment on the desire and capability, it is necessary to design a transition plan to get the next in command used to running the business from a higher level (assuming they have been more involved in the day-to-day operations).  One of the challenges in this grooming process is that the future president has to transition their existing responsibilities as well.  An orderly transition takes many years, it would be safe to plan 5-7 years, as the current president usually has many deep relationships that can be difficult to migrate.

 

In several instances, I have seen smart business people unable to objectively assess family members, as if they are blinded by love.  Individuals who can normally make very logical and sound decisions may face a difficult time if they have to accept the reality that one or more of their children is less capable than another.

 

How Loyal are your Friends?

Doing business with friends can take many forms, it does not have to simply mean starting a business together.  It can also involve a customer / supplier relationship.  As with all customer / supplier relationships, if the relationship is very strong, there is less focus on pricing.

 

I had a client where the insurance broker was a friend of the owner.  One of the policies was up for renewal at $24,000, two other brokers came in lower, one by over 50%.  That “friend” no longer appears to have been working in the best interests of his client.

 

If you find yourself in such a situation with friends or family that needs to be straightened out, keep in mind that it is possible to resolve, but it will likely take longer, and can possibly involve some awkward social / family gatherings.

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