There are many good reasons why a person should start up a family business: be closer with the family, build a legacy, assist the next generation with a career path, etc.
However, we must also examine the other side – the dark side, or the reasons people should not start a family business. Sometimes when we examine that side of things, the path becomes more clear.
Owning a family business is not a get-rich-quick scheme. While there are some positive tax and wealth building ramifications, the failure rate of family businesses, especially being passed from one generation to the next, should cause anyone to pause and reconsider. The businesses I have seen work most successfully are those that did not try to build a family business, but it happened anyway. Laying the foundation for a good, solid business is the first and most important step.
Owning a family business is not easy. There are perks – pride – that come with saying you own a business. But for the vast majority of business owners I meet with and speak to, there is a downside. Divorce and substance abuse are two significant things I have seen in working with families. Even the marriages that stay together have reported major challenges as the business saps time and requires presence. The substance abuse tends to come in later generations as they have access to money and a certain lifestyle. Time is the scarcest commodity for a family businessperson. Your life partner and others in the family must understand that your time will be rare.
Owning a family business means you may have decided on another’s career path. The pressure on the next generation is already set in stone before they come out of the womb. For many business owners, there is an expectation that the next generation will want the business and be capable of running it. This is not always true. Further, can you temper your emotions and drive to have the next generation fulfill your dream? Is that fair to them? And what happens if the next generation can’t run the business due to their lack of skills? That is not their fault! Be prepared to train the next generation and let them walk away with no hurt feelings if your business choice is not their business choice.
Business failure could tarnish your family legacy. Having your name on the door means your name is connected with the business, for both good and bad. An issue which affects the business can impact and tarnish the family name and reputation. A global example of this was one of the largest family businesses in the world, Takata Corp. It experienced an airbag failure which both brought down the company and the family. While no family goes into business with the expectation of it leading to ruin, it can happen and the legacy and name will take generations to recover – if ever.
Chances of failure are high. According to Jim Baka, chair of the Family Business Legacy Institute here in southeastern Wisconsin: “The absolute No. 1 reason for not owning a family business is the fact that the vast majority of family businesses fail, and so do the relationships (fail) between family members. For most families, this outcome is the most painful situation that could ever be imagined.” This ominous foreshadowing should be scary enough for most people, but the truth is, it is unlikely to stop most from proceeding with their endgame. Having served as a regent for several major family-owned firms before starting the FBLI, Baka comes with some authority. Yet he works to help these same family-owned ventures, as their success is so important to the health of the economy. With the changing tax code favorable to startups and family-owned enterprises, this help could not come at a better time.
While the reasons not to own or start a family business are daunting, the facts are we need them!