What is a Family Business? According to Entrepreneur.com, a family business is defined as “a business actively owned and/or managed by more than one member of the same family. Entrepreneur.com, Entrepreneurial Staff, Small Business Encyclopedia. Simply put, a family business is a small or closely held business which is owned and/or operated by family members through marriage or blood. Often times, a family business is comprised of multiple generations of family members from Fathers, Mothers, Sons, and Daughters and their spouses all working towards a similar goal of operating a small, closely held business in a profitable manner.
There are three traits of a successful family business:
1st Element: Operational History is Greater Than Five (5) Years
The first element of a successful family owned business is that they have been in business for greater than five (5) years. Often times, family businesses fail for a lack of capital and profitability. Expenses exceed revenue is a major problem for family business owners. One of the elements that make a family-owned business different is that most family-business owners and their families do not rely primarily on the family business for income.
One of the benefits of marriage and having multiple employees and family members employed in a family business is there are multiple stack holders. Husbands and wives have a backup plan in case of slow business growth. Often, small business owners find it difficult to master learning how to operate a business and making a profit during the first several years of a business. It is common for business owners to make rookie mistakes from their inexperience in running a new venture. Even if one has experience with a different type of business venture, each business and their geography and time period effects whether a business owner will be successful or not.
Family businesses differ than many small businesses because family members are often the employees and they have a greater incentive to care about the profitability of a business and its’ treatment of its’ customers. Furthermore, during difficult times, family members that are stake holders in the business’s future are willing to work for minimum wage or no wage. This makes family businesses different because most small business owners have difficulty in making payroll during the beginning phases of a business. A son or daughter can provide critical labor and critical skill sets that a typical small business owner may not possess or afford to possess.
2nd Element: Diversity of Skill Sets
The second element of a successful family business is a diversity of skill sets. One of the key challenges that small business owners face is finding reliable and good employees. One of the advantages of having more employees is the business has more skill sets and can operate more professionally. A key disadvantage to any small business is the lack of skill sets. An individual owner only has a certain amount of skill sets that they offer a business.
For example, most small business owners are naturally good at sales skills. Unfortunately, sales skills alone are insufficient to lead a business from infancy to growth stage. Having critical skill sets and attributes are critical for any business to survive and become a profitable, healthy business. The biggest liability concern that small business owners have is payroll tax concerns and tax related issues.
In my professional experience, small business owners often fail to properly follow corporate and tax formalities as required by federal, state and/or local tax authorities. A family business has the district advantage of having multiple members of a family where trust is established where different individuals can serve the business in a manner that utilizes their particular strengths and weaknesses. Family businesses have unique traits that make them unique and special to advise. Typically, most family members have a person or two that are strong with managing finances. Corporate formalities and managing finances are a critical skill set for family business owners.
3rd Element: Family Businesses generally have more capital
The third element of a successful family business is capitalization. Multiple family members and multiple stake holders leads to greater capital investment. Family business owners have greater capital because there are multiple family members involved with greater economic power. One of the greatest weaknesses of any business is a lack of capital. Insufficient capital is a critical reason small business owner fail.
For example, my family visited a local restaurant owner nearby to try a soul food restaurant in the local area for the first time. Unfortunately, the banana pudding was horrible and old. I suspect that a main reason for the problem is the restaurant is slow and likely failing to make any profits for re-investments. In the best-case scenario, the business owner may make an excellent banana pudding, but a lack of revenue and profits have them making corporate and business decisions due to lack of capitalization. These business decisions are bad long-term business decisions and will affect the economic vitality of a startup or family owned business.
Access to capital is critical for any business but particularly family owned businesses. Generally, family members will have greater access to capital because husbands and wife’s and multiple generations of family members often will include at least a couple of people that have good credit and access to capital.
In conclusion, Sean Robertson concentrate in family business planning for restaurants, family-owned businesses, and professional practices. Sean Robertson understands the legal and business concerns of family businesses and helps them with solid business and professional legal advice that helps protect their business from liability concerns and helps them transition from one generation to the next generation.
Sean Robertson and Gateville Law Firm may be reached at 630-780-1034. Our website is www.GatevilleLawFirm.com.