Invest In My Idea

How do you plan to finance your business startup? If you are like most new business owners, you will draw on personal and family savings to pay the startup expenses and keep the business going until the cash starts to flow in. Although this is a very reasonable and common approach, it will affect your family’s normal activities. In most cases, this will mean your family having less, rather than more money available, at least for a while. Obviously, it is important to prepare your family for this eventuality and plan accordingly.

Your new business will consume more than just money: It will also absorb as much time and energy as you are prepared to devote to it. Like the money that you invest in your business, the time and energy that the business consumes is unavailable for family purposes. For some families, this is not a problem because other family members play active roles in the business.

Building Block

Whether actively involved or not, all family members are affected by the startup of a new business. To minimize disruption, it is important to understand that family and business cannot be fully integrated. Many issues apply to managing the business that do not apply to maintaining a family and vice versa. Identify these issues and resolve any problems before either the business or the family life is jeopardized.

Family Money Becomes a Business Asset

Business ventures, like all human endeavours, give rise to numerous clichés. From the business perspective, “it takes money to make money” is particularly annoying because it is so true. Certainly the primary purpose of a business is to generate revenue. Just as certainly, you must spend money to generate this revenue.

Virtually all owners spend their own, or their family’s, money to start their businesses. Personal or family funds that are allocated for business purposes are obviously not available for family use until the business is profitable enough to return the owner’s initial startup investment. With fewer funds available for the family, it may be necessary to make a lifestyle change.

Entrepreneur Beware

Lifestyle changes that come from starting up a business usually have to do with having less money available. For the sake of family harmony, make sure all family members are aware of what is happening and how long the situation is likely to last. You are more likely to get the support of your family if they know sooner, rather than later, about the demands the business will make on the family’s financial resources. It is difficult to succeed in running your own business; don’t make it any harder by jeopardizing the support of your family.

The Cash Flow Roller Coaster

It’s not just at startup time that owners will be required to contribute money to their business operations. Few businesses experience consistent cash flow. For most, there are periods when cash floods in. For retailers, it’s the Christmas season; for the accounting profession, it’s tax season. Conversely, there are periods when cash flow is more like a trickle. These are the times when everyone except creditors appear to have forgotten that the business exists. More money is going out than is coming in.

Without a bank line of credit, this money will come from—where else? —the owner’s personal resources. Once again, money going into the business will be temporarily, perhaps permanently, unavailable for family or personal purposes. Members of your family should be forewarned that this situation might occur. Unless you have had the foresight to make provisions for a dry season, any shortfall must be covered by personal funds. If, as an employee, you customarily took a vacation during spring break you might have to change your plans if February and March are cash-trickle months.

Hot Tip

To minimize the disruption in personal or family cash flows arrange a bank line of credit before you need it. As with all bank financing, it is easier to obtain these services when you don’t need them than when you do.

To balance your time between your business and your family, designate a set period every week (such as Friday night or Sunday morning) that you will spend with your family, away from tending to business mat-ters. Treat this as a commitment as important as a regular meeting with clients. Not only will it contribute to domestic harmony, but it will also give you a break from your business, allowing you to be more refreshed when you resume.

What You Give to Your Business Takes from Your Family

Running your own business can consume an inordinate amount of time, attention, and energy. As well as the obvious time spent—the time that you actually run the business—there is the time you spend thinking and worrying about it. Few owners can completely forget about their businesses, regardless of how hard they try.
Like money, your time, attention, and energy are limited resources. Also like money, whatever is allocated for business purposes is unavailable for family or personal enjoyment. Make sure your family knows about and is supportive of the new demands on your time.

Can  I  Please Use  the  Computer?

As well as financial and personal resources, your new business might also require the use of other family assets such as the computer, the car, or even some space in the family home. The good news here is that part of acquiring and maintaining these assets can be claimed as an expense for tax purposes. In other words, you can write off (over time) part of the cost of any family assets used for business purposes.

The bad news is that instead of writing off the entire cost of the assets, you can only write off the percentage of use that corresponds to actual business use. Similarly, if you use part of the home for business purposes, you can claim a portion of the home occupancy expenses as an expense for tax purposes. Your tax return contains a schedule that allows you to calculate allowable claims for business use of automobiles and home offices. The really bad news is that you must maintain detailed records to support these claims. In most cases, the actual tax savings are minimal.

 Do Family Members Belong in Your Business?

 Family  Members  as  Employees

When business owners look for help, they frequently look first to members of their own family. This approach yields several benefits. It keeps money in the family. The owner can transfer money to family members and claim the transfer as a deduction for income tax purposes. Further, these related employees can probably be available for as much or as little time as required.

 Unfortunately, relatives do not always make the best employees. They may lack the requisite skills and interest to perform required tasks 

Family  Members  as  Owners

As well as hiring family members as employees, it is also common to include them in the ownership and management of small businesses. Statistics Canada reports that there are approximately one million family-operated businesses in Canada.

 As a result of the changes that have taken place over the past few hundred years, today’s family businesses have evolved far beyond the early agricultural and craft-based models. Today’s family businesses tend to be more cooperative and less dictatorial, with family members playing more active roles in the ownership and operation.

Assuming that family members have the requisite interest and skills, there are sound reasons for operating a family business. Firstly, there is an existing bond among family members that could facilitate their working together in pursuit of a common mutually beneficial goal. It is often difficult to have employees commit to specific business goals. Provided family members can agree on what they want the business to achieve, it should be fairly easy for them to commit to achieving these goals.

Secondly, family businesses make it possible to keep things in the family. Obviously, profits that are shared among family members, rather than among nonfamily owners, will yield more income to the family. Family members might also be better at keeping secrets and maintaining confidentiality than nonfamily employees.

It is often difficult for business owners to share control with others. Fiercely independent, they sometimes find it difficult to share or delegate responsibility for making things happen and for keeping things going. In family businesses, with control shared among family members, owners do not really feel that they are giving up control.

A major benefit of family businesses is the simplification of succession planning. For small business purposes, succession planning is all about planning who will operate the business when the current owner retires or, due to poor health, cannot continue to run it. With family members actively involved in running the business, it should be a relatively smooth transition from one family owner to the next. This will benefit owners, customers, suppliers, and nonfamily employees. Being familiar with how the business is run, relatives are unlikely to introduce disruptive practices when they assume responsibility for operating the family business.

There are also sound reasons for not starting a family business. If one or more family members has no interest in participating in the business or lacks the appropriate skills to make a worthwhile contribution, no one will benefit from this family participation. Don’t assume that just because you are very excited about your business that your family will share this excitement. Before counting on family members’ participation in the business, make sure that they are genuinely interested and can make valuable contributions.

Also, when family members work together, there is a tendency for domestic issues to spill over into the work situation and vice versa. One of the good things about working away from home is that it helps separate home and family. If, for example, you have a dispute with your spouse or partner over something as trivial as leaving the top off the toothpaste tube, a day apart will help both of you forget about the issue. On the other hand, if you spend the day together working, the normal pressures of running a business can help escalate a nonissue into a disagreement. Ordinarily minor work annoyances, such as the printer cartridge running out of ink, can ignite into a major conflict that would otherwise have been ignored and forgotten. Domestic differences and business problems can be a very toxic combination.

Another area of concern is the difference in our relationships with family and co-workers or employees. Some people treat their family with more respect than they do co-workers. Conversely, co-workers may see the agreeable people-pleasing sides of our personalities while we reserve our ugliness and nastiness for family viewing only. This can be problematic if family members believe that employees receive more favoured treatment or if employees perceive that relatives are being treated better than they are. Realistically, it is difficult to treat family members—whether owners or employees—the same as nonfamily employees. The relationship with each group of people is, after all, quite different.

I have had countless clients who involved family members in the business to share the wealth during the good times, only to face the decimation of family income when cash was tight. 

Entrepreneur Beware

Husband-and-wife family businesses risk breaking up when the marriage breaks up. To minimize this risk, make sure that any business agreements include details about what will happen to the business in the event of a marriage breakup. 

 Divide and Manage

The challenges faced by family businesses go beyond the ownership and operating challenges that face all small businesses. They also go beyond the difficulty of balancing work and family, an issue that anyone who works and also has family responsibilities must face.

 Family businesses represent the merging and integration of three kinds of critical issues: ownership, operation, and family. To make a family business work, and indeed succeed, family members must consider and resolve these issues.

• Ownership  Issues
•  Who actually owns the business?
•  If ownership is shared, what is the interest of each owner? How is this interest determined? How is it valued?
•  How was the ownership interest acquired? Was there an actual contribution of money? Was the ownership interest a gift? What tax issues arise as a result of mak-ing a gift of an ownership interest?
•  Who has ultimate decision-making authority? What happens if joint owners can-not reach an agreement?
•  What restrictions apply in dealing with the owners’ interests? Can they sell their interests or pledge them as security for loans?
•  What happens to the owners’ interests in the event of a marriage breakup? What buy-sell provisions apply?
•  How will ownership interests be transferred to other family members? When can these interests be transferred? Will they be transferred on death or on disability? How will the interest be valued?
•  How will the owners share the profits? If bonuses will be paid, how will they be cal-culated and when will they be paid? 

Management  Issues

•  What are the goals of the business? Are all family members committed to achieving these goals?
•  Are there nonfamily directors or advisors?
•  What is the role of each family member in the management and operation of the business?
•  How will each family member be compensated for his or her contribution to the management and operation of the business?
•  Will the next generation take over the business? Who, specifically, will take over? How will they be prepared to take over the business?
•  How will family members get out of the business?
•  How will loyal nonfamily employees be managed? What incentives will they be offered to ensure that they stay on with a transfer to the next generation?

 Family  Issues

•  What will be done to ensure that family members remain interested in and com-mitted to the business?
•  How will the current generation’s need for personal income be balanced with the next generation’s need for equity in the business?
•  How will family members who do not actively work in the business be treated equitably?
•  How will spouses and in-laws who do not work in the business be treated?
•  How frequently will family meetings be held to discuss and resolve these and other issue?

The Least You Need to Know

 Starting your own business may disrupt your normal cash flow; make sure your family is aware of this and be sure to make plans to deal with any potential cash shortfalls.
 
Starting your own business can also be a major drain on your time and energy; again, make sure that your family is aware of this and make plans to deal with any potential problems.
 
Employing family members in the business does not always work well for every-one. Try to maintain a balance between family and business activities.