What You Should Know Before Going Into Business With Family

October 14, 2020, 5 min read

Opinions expressed by Entrepreneur contributors are their own.

Some of the best businesses in the United States and around the world are owned and/or run by families: Aldi, LG Corporation, Ford, and Berkshire Hathaway, to name a few. These big-name companies started out as small ventures, and they prove that working with relatives or loved ones can be enormously successful if you approach the opportunity the right way. But if you’re thinking about starting your own company with people you love, first consider these points to see if moving forward will serve everyone well.

Related: 5 Keys to Successfully Leading a Family Business

Can you get everything in writing?

Years ago, my brother invited me to come work with him in a small oil and gas company. The deal was that we’d have combined investments operating in Oklahoma and Texas. He would be the engineer, and I would deal with sales and marketing from Chicago.

Unfortunately, this didn’t work out. We didn’t hit oil in one of the main locations, and there was a huge disagreement about whether he had said I could have ownership in the business. We’d never put our agreement on paper which created a mess and a lot of hard feelings. In fact, the animosity was so bad that he fired me and we ended up not talking to each other for a full five years. We reconciled after our father passed away, but through this experience I learned just how important it is to clarify all terms — before you get started.

Don’t assume that because you’re working with family you don’t need a contract or operations manual — or that you’ll sail through any conflict. On top of ownership, make sure to detail even little things like vacation and whether you’ll have an office. Setting expectations matters. In my case, my brother had expected me to track and inform him of all my daily responsibilities, and I felt like he was micromanaging me. So be clear about what everyone is going to do, how they’re going to do it, and the specific conditions under which you’ll take certain actions (e.g., expansion or closing down).

Find a third party to help you overcome biases

All kinds of biases can interfere with how well you can run a startup or small business with somebody from your family. For instance, with my brother, we really had a hard time with anchoring bias. This is where you rely on the first piece of information you have. When we started the oil and gas company, we hadn’t lived in the same state for 30 years. So we took experiences we’d had with each other as kids and let them color what we thought it was going to be like working together. We quickly found out that we were very different people than we used to be.

Other biases can interfere, too. Some really well-known ones include confirmation bias, where you seek out information that confirms what you already believe, and negativity bias, where you’re more powerfully influenced by negative experiences than neutral or positive ones. When things start to go wrong, these biases can stop you from finding common ground and make problems spiral out of control.

So, you really need a neutral party that hasn’t been connected to you or your family members to step in and be an arbitrator. They can work out any differences based on what you’ve initially put in writing, and they can remind you that the most important thing in or out of business is the relationship. Find someone you and your family member both trust and then make sure they understand what role they’ll play in mediating any disputes.

What’s pay going to be like?

I hate to break it to you, but good feelings of cooperation aren’t going to pay any bills for you or your family members. So you need to make sure right out of the gate that you’re able to pay everyone a wage they can actually live on. This is especially important when you’re just getting off the ground and need to support yourself with initial investments until the company actually turns a profit. Don’t allow compensation that’s subpar just because you’re working with a sibling or someone else you love. Know what’s fair in every role, and be clear in your written agreement about the financial point at which you’ll pivot, scale, or close the business.

Related: When Our Son Was Born Nearly Blind, We Started an Eyeglass Business for Children

There are hundreds of companies operating today headed by families. To ensure yours will be a successful business, too, focus on these initial questions. If you have a solid answer for each of them and everyone is clear about the goals, you can create a legacy — and profits — for generations to come.