Top 3 Family Business Traps to Avoid

by Cody Martin on February 15, 2013

The family business is an age old American tradition. Up to this day, majority of the businesses in the country are family owned. In fact, a 2010 study by Intuit showed that 90 percent of the 21 million small businesses in the US are owned by families.

You might be thinking that since most of the businesses are family owned, this is also the most effective way to start your own company. After all, one of the main challenges of running a business is finding people you can trust. And with your family running your business, that should not be a problem anymore.

Or will it? Running a family owned business actually has unique challenges that can lead you to ruin. Here are some of the common family owned business traps you should avoid:

Not putting it in writing Top 3 Family Business Traps to Avoid

Too much trust, even between family members, can lead to the downfall of your business. A lot of people start their family business with too much optimism that they do not even consider the myriad of challenges that their company will face. Some of these challenges include the establishment of the chain of command. Who is really in charge of what in the company? Then there is profit and debt sharing. What percentage of the profit and debt does each family member receive? And even if you get the business to be successful, there are other challenges that will emerge such as succession.

All these can lead to internal conflicts, which can all be prevented if everything is laid out in writing and is agreed upon by everyone. By establishing a formal policy that outlines the roles of each member, compensation for each member, conflict resolution, and everything else that’s business related, you save yourself from a lot of petty arguments in the future.

Hiring unqualified family members

Once a business is fairly profitable, a lot of family owners promise their children and their other family members a place in the business no matter what happens. As a result, the family business becomes a fallback option for these members in case they fail in their chosen endeavors. And because they are family members, they are able to hold key positions in the company even without the right qualifications.

The best solution for this is to implement strict training and screening, especially for key positions within the company. If family members are to hold key positions within the company, they should have the proper degree, training, and experience for the job. If not, it is better to put them in positions where they will not affect the company significantly but will be able to learn and move through the ranks.

Becoming too insular 

Most of the time, there are far too many family members and the business isn’t big enough to accommodate everyone. As a result, all the key positions are filled by family members, leaving no room for outsiders. And that can be a serious problem.

By getting family members exclusively, you run the risk of being too insular because a lot of the beliefs and principles will be pretty much the same. An outsider or a non-family member, on the other hand, can bring new perspectives about a lot of things. From adapting new technologies like a new business phone system or new accounting software, to adapting new policies to improve the workplace, these new ideas can be the catalyst that brings your business to the next level.

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