Avoid The Family-Owned Business Pitfalls

Family-owned businesses are popular all throughout Canada. Many of these businesses have been passed down from generation to generation holding a significant place within the family’s history. Often, these family-owned businesses tend to provide that “warm and fuzzy” feeling associated with a product considered to be reputable and long-standing within the community.

Although many family businesses have sustained certain families for generations, there are a number of hardships that come along with maintaining the success of these ventures.

Michael J. Conway, JD is General Counsel for the Baja Fresh Mexican Grill chain of restaurants in Thousand Oaks, California and Stephen J. Baumgartner teaches strategy at the Graziadio School of Business and Management and consults at the Encino, California, law firm of Greenberg & Bass, LLP. Together, they have written about the many pitfalls that have lead to the demise of family-owned businesses and offer tips on how to avoid them.

The first pitfall, they write, is failing to document the terms of the agreement in writing. They regard this as the single most common and costly mistake made by family business owners. Most people assume that because they are dealing with family members, there is no reason to generate a written agreement. Some feel that even raising the topic with family members is taboo.

Conway and Baumgartner insist upon having written agreements to help avoid the potential of future problems within the business. “Without a formal agreement,” they write, “the business and the family members will be at the mercy of the Corporations Code, which may result in unintended and unfavorable consequences for everyone. In the event of litigation, more often than not, the family members will find themselves arguing over the terms of their oral agreements.”

Another pitfall that is common in family businesses is failing to plan for the future. Family members, say Conway and Baumgartner, should put as much attention into planning the succession of their business as they do their personal estate planning. Without a plan, the business could potentially fold if the owners cannot work together to manage it, especially in the event of something unexpected or tragic.

There are a number of things to consider. How would a divorce impact the business? What would happen in the event of an owner’s death? What if an owner wants out of the business?

These are just some of the questions that owners of family businesses should ask themselves to avoid the collapse of a business that has, in itself, become a member of the family. Family businesses are great assets to communities all over the country. Like the families themselves, these businesses need to be protected.