You can choose your friends but you can’t choose your family! How many times have you heard that saying? Business and family—do they mix? Not surprisingly the answers are debatable, and ultimately, there really is no clear cut answer. After all, as the old saying goes, it’s nothing personal; it’s just business.
If you have read any of my articles previous to this one, then you know that my partner in my real estate investments is my brother. Furthermore, our goal is to include more family in the business and create some retirement income for several of my siblings (I have five).
I realize that much of mainstream wisdom is to never go into business with family. However, in my opinion, why would you not want to go into business with family? Author Jim Butcher once said, “When everything goes to hell, the people who stand by you without flinching, they are your family.”
How We Make Family and Business Work
I grew up in a large, close-knit family. Perhaps this is why it works for us, but I also believe it works for several other reasons. Hopefully by detailing how we structure our family business, it will allow others to find the “best of both worlds” so to speak, and enable them to work with family.
Below are five key concepts that allow us to build a real estate investment portfolio while still remaining that close-knit family.
There are few things in a business partnership that can sour it faster than lack of trust. If you do not trust your family, then do not go into business with them, period. Trust is essential to operating any business with a partner(s), be they family or not. Trust is more than knowing they will not steal from you. It boils down to knowing their character and being able to trust their opinions, decisions, reliability, and accountability.
I know I have said before, “trust but verify.” However, this is not the type of trust I am speaking about in a family business relationship. In a family business you must just simply trust. Think about it. As a kid, how often did you get upset if your parents asked you to accomplish a task and then checked to see if you did it because they didn’t trust you would?
In a family business type of relationship, those same animosities can come up if one family member is tasked with a project or decision and the others feel the need to verify that the project. Or they want to make sure the decision made was the right one.
Trust is the single most important requirement involving a successful partnership, especially if it is a family partnership. Without a trusting relationship it is just a matter of time before the walls crumble around you.
While I believe trust may be the single most important aspect of a successful family business, communication is the glue that holds it all together. My brother and I live 100 miles apart, yet we communicate several times a week about the business. Anything involving the rental properties, potential properties, ideas, suggestions, business improvements, anything gets communicated regularly. While this may be more difficult to do with multiple partners, it is still attainable.
Communicating problems, costs, ideas, concerns, etc. is paramount to making the “family business” work. While communication seems like a no brainer, you would be surprised at how often the lack of communication causes issues. Small problems can lead to roadblocks that can sink your partnership before it gets a solid foundation.
In my day job in law enforcement, communications, or lack thereof, can lead to devastating results. From day one we preach communication among coworkers and between dispatchers and patrol officers. I have witnessed first hand how the lack of communication has led to some extremely hairy situations.
3. Solid Business Plan
A business plan is just that, a plan on how to run your business. However, there are many different ways to write out a business plan. In my opinion, a good business plan must be a detailed business plan. We have a 15-page business plan that details who does what, who makes what decisions, and to what dollar amount each partner is allowed to spend without consulting the other.
We detail everything we want to accomplish in our business within our business plan—from how we market a property for rent, to how we screen tenants and how we collect rents. Business objectives, keys to success, strategy pyramid, advertising, even how many properties we purchase per year are all part of it.
Furthermore, we list out each other’s duties. For example, my brother, who is in construction, has the final say on what upgrades or repairs are required when we buy a property. He also approves all maintenance costs and has the final say on what a property sells for. He does not need to consult with me. He simply obtains the best price he believes is possible and approves the sale.
I have the final say on the purchase of a property and whether or not we can afford upgrades. Also, I deal with the tenants and am in charge of qualifying tenants and structuring our leases or evicting tenants if needed. I deal with all banking requirements and obtaining loans and locating properties. We even detail who does record-keeping and how the bookkeeping is completed.
Finally, we lay out an exit plan in the event one of us wants out of the business. Below is the actual plan we have structured in case one of us no longer wants to be part of the business:
If at any point Wendell Connell or Wayne Connell decides to sell their share of any properties (hereafter known as the seller) they must sell to the remaining partner (hereafter known as the buyer) at 80 percent of the estimated cash value of said property. If the buyer sells that property within 24 months of buying it from the seller, the buyer must pay the seller the forfeited 20 percent of the actual cash value at the time of the original sale. The buyer keeps any and all appreciated value of said property accrued after the date of purchase from the seller.
In the event that one partner wants to sell their share of any properties and the remaining partner is unwilling or unable to purchase that share, then the properties shall be sold and all debts pertaining to said properties satisfied. Once all debts pertaining to said properties have been satisfied, any remaining monies shall be split evenly between the partners.
A detailed business plan is the foundation under which our business prospers. Many issues can be avoided with a clear-cut and concise business plan.
4. Specific Duties/Details/Playing to Your Strengths
The above were all mentioned in the business plan section, but they are important enough to warrant their own heading. In order to work well with family, it is important that each partner understands the strengths and specific duties of the others as well as being detailed about those specific duties.
It is not cost effective for each partner to be an expert at all aspects of the business. It is far more effective to split up the duties and let each partner excel at their individual duties. Due to my day job, I am used to confrontation and being direct and blunt. Because of this, it is natural that I deal with the tenants, since those specific strengths may be needed.
My brother is a craftsman and is detail-oriented about construction. I know a little more than the basics of construction, but nowhere near the level that my brother does. Therefore, it is natural that he attend to the construction aspects of the business.
By giving each partner a specific duty that plays to their strengths, it allows us to have a more productive and, hopefully, profitable business.
Last but far from least, focus has the ability to make or break a family business. Focusing on the business and being able to keep family drama out of the business is a difficult but extremely important cog in the wheel that keeps the business turning.
Having the ability to focus on our own duties contributes directly to how successfully or smoothly the business runs. If each partner gets laser focused on efficiently and effectively managing their part of the business, it stands to reason that the whole will exceed the sum of its parts.
However, focus can be, and often is, one of the most difficult tasks to accomplish. It is easy to get distracted by second guessing other partners or believing one can do “their” job better or more efficient. For most people, focus is the tripping point of a partnership.
Taking away focus from the business plan can make you lose sight of the purpose of the partnership. Focus on your part of the business and allow the others to focus on theirs. By doing so, you create an environment that is conducive to allowing the business to grow and thrive.
Should you be business partners with family? I think so, if and only if you lay out a clear-cut, concise, business plan, and follow the key aspects listed above (and others). Our success is centered around the fact that we do not overlap duties and that we trust in the other’s abilities, unconditionally.
I would rather face a known value by partnering with family than form a partnership with someone who does not hold the same values or work ethic as me. You get out of it what you put into it. Remember that when contemplating whether or not to partner with family.
Family, for better or for worse, will be there when, as Jim Butcher said, everything goes to hell. Working with family may not be for everyone. If you want to be in complete control, or can’t let go of hurt feelings or avoid family drama, then do not risk your personal relationships for financial gain.
However, if you care enough to be flexible with your family, and try to work with them, and not against them, you can have a rewarding partnership that can create deeper and longer lasting bonds. It is fun to watch a business grow and see the good it can create in the lives of those closest to you, your family.
Have you ever worked with family members before, and what has the experience been like?
Share with a comment below!