The first time I started a small business with a family member, it went bad. Bad because I was too afraid to ask for the financials and I just did not have any idea what was happening in the business.
After that, I tried to stay away from doing another business with a family member because money seemed like a taboo topic to discuss. And I’m hesitant to ask my elders or hubby to do their work because we might end up quarreling.
Avoid this uncomfortable scenario by being clear about the following items from the start. Generally, this applies to any partnership, not just for family members.
1. Set aside the investment money in one visible account.
First, all partners should agree on how much capital each will contribute and the equity (the percentage of ownership) each member will have. Some partners would invest only their time and no capital involved and that should also work. You need to agree on how much equity the other member can have if one provides capital while the other their skill.
Make sure you save the funds in one visible account. It’s best to have it in one bank account that acts as your revolving fund. Use this account to pay all expenses, receive sales and even withdraw from, if need be.
The main purpose is for all parties to have transparency of what each contributes and transparency of on how and where the money goes. The other purpose is to find out if you are really making money or the business is already losing.
2. Be clear on who does what.
Discuss the roles and responsibilities of each partner - including what they shouldn’t be doing. Who will take care of operations, logistics, marketing, product development, finance, and many other roles?
If you are a couple and have children, it’s also important to discuss how to manage your family affairs while running the business.
It’s all too common to see that only one person in the partnership does all the things. If the other party is being lazy, then there should be an open discussion because you already have agreed on the responsibilities in the first place.
3. Plan on how to resolve conflicts.
Problems and conflicts are inevitable. How do you resolve it?
As a family, we will all attempt to reach a settlement; but in case all parties do not agree, what will happen then? Who would have the last say? Would it be based on age (who is older) or by position/responsibility? Is it one vote for each partner?
Who would be the best to mediate in case all partners do not agree? Would it be your parent, sibling, or, worst of all, lawyer?
Here are some sample solutions:
- You can rely based on role and responsibility. The person with the most relevant role takes more votes or may always have the final say.
- You can use a voting system where each member has one is to one power. This applies if members are not even number
- You can vote for one person to have the highest position (e.g. President/CEO/Primary Owner) so that if all else fails, this person will have the last say.
4. Discuss an exit agreement.
What happens if a tragedy occurs and one of the business partners couldn’t continue with their role anymore? What happens when one partner has a change of heart and wants to leave the business? If someone exits (willfully or not), what happens to their shares? Who should have them? Can another member buy all the shares?
You might think it too futuristic (or fatalistic) but this is for the best interest of all parties involved.
5. Put everything you discussed in writing.
Lastly, put everything in black and white (print on a paper). Even if you don’t go to the notary public to have it signed and notarized, it’s still best practice to have everyone review and agree on it.
You are now more than just family members, you are business partners! Business partners should always mean business.
Here is a simple document that you can use as a starting point.