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Is a Family Business or Partnership Right for You?

Here are some tools to help think it through.

What does Harper Lee’s classic novel “To Kill a Mockingbird,” which was turned into an equally stellar film, have to do with business?

It gave us this quote: “You can choose your friends, but you sho’ can’t choose your family.”

And while relatives are the banes of existence for some people, that doesn’t stop many entrepreneurs from starting family-owned businesses–or entering into partnerships with close friends, who can be just as frustrating as relatives.

In my loan advisory firm, we frequently get phone calls about partnerships that have gone awry.

Let’s look at the pros and cons of a business with principals having close ties.

On the plus side, loyalty should be strong and the goals are likely to be similar.

As chron.com noted, “Having a certain level of intimacy among the owners of a business can help bring about familiarity with the company and having family members around provides a built-in support system that should ensure teamwork and solidarity. Other benefits of a family business include long-term stability, trust, loyalty and shared values.”

Don’t forget stability: Family members are far more likely to be there in the long run than outsiders who might bolt the first time a better opportunity presents itself.

In addition, family members are more likely to be flexible. Need to take your child to the doctor or soccer practice? Want to take a long weekend on your anniversary?

Family members are probably going to be more understanding than strangers.

It should be noted that family-owned businesses seem to enjoy extra cachet among customers; the personal touch appeals to customers, suppliers, and circles of influence.

And a family-run business tends to have lower starting costs because participants may well work for free or for little compensation until things get up and running.

Moving to the negative side, just because someone is a relative doesn’t mean they are right for the company. And because they’re family, it will be that much harder to remove them from the job if they prove to be inadequate. Balancing business needs with personal relationships can be tricky.

Meantime, sibling rivalries may rear their ugly heads. And differences regarding succession–what happens when the next generation has radically different ideas or simply isn’t interested in the business –may also wreak havoc both in the business and in your personal life.

Because everyone’s related (or at least the key members are), the corporate structure may well be lacking, which can lead to regulatory issues and poor professionalism. Employees who aren’t part of the family may feel resentful and neglected, especially when nepotism is obvious.

Also consider that a family business may lack proper perspective and alternative viewpoints. If everyone has similar life experiences, they’re also likely to have the same blind spots. Group thinking in this case won’t be helpful.

That leads to this question: What can be done to prevent problems and reduce the risk–there’s no way to completely eliminate it–family businesses and close partnerships pose?

Consider the previously discussed risk tolerance post.

Have each potential partner take the test, then compare answers. This will give you a compatibility gauge in terms of business philosophy.

If you score as “risk flexible,” but brother Tom is “risk neutral” and cousin Joe is “risk averse,” you’re going to clash. Conversely, if your scores are similar, you might expect reasonable good compatibility, which bodes well for your working relationships.

In addition, all partners might want to sit down and write out their stretch goals for the business three years from now, and then compare notes. Granted, it’s a bit premature if your business isn’t underway, but your answers provide another information point for comparing business philosophy.

Plenty of family-owned businesses exist in the world today, and there’s no inherent reason to dismiss the idea out of hand. That said, compatibility may well be the ultimate deciding factor in success, so be sure to consider working relationships before moving forward.

There are pros and cons to staying in a family-run or partner business. Pros: loyalty, trust, stability, familiarity. Cons: incompatibility, old sibling rivalries, divergent goals, dissimilar risk-tolerance levels.

How do you and your partners calibrate?

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