From the May 1999 issue of Entrepreneur

Your uncle's family has a real estate business, and you've got a family business that needs to expand its quarters. Should you hire the relatives to be your brokers?

You and your cousin start a business together. Because capital is at a premium, you use your father, an accountant, to do your books; your aunt, a public relations specialist, for marketing advice; and your sister, a Wharton grad, to help you create a business plan. What could be better than intelligent and loving help that's freely given?

Your family owns a successful restaurant, but it doesn't have room to absorb all the siblings, nieces, nephews and cousins who'd like to work there.Some members of the family branch off and form their own bakery, hoping to supply restaurants in the city with breads and cakes. Should you hire them to supply your establishment with baked goods?

Contracting with family members to provide services for your company sounds like a great deal. You're working with people who care deeply about you and whom you can count on to give you the best rates. You're also helping kin--without having to put them on the payroll.

"Chances are it won't work out," warns Leslie Dashew, a family business advisor and head of The Human Side of Enterprise, an Atlanta organizational development consulting firm specializing in family-run businesses. The biggest problem? Underperformance, says Dashew. You may pay less for goods or services if you're a relative, but as a result, you may not get the same service as a client that pays full price. If you don't, it's hard to complain to kin, so you may have to swallow the annoyance, which builds up resentment, or put it on the table, which can jeopardize your personal relationship. On the other hand, if you pay full-market rates for the family member's products or services, you might end up wondering if it's really worth it.

Hiring your family members as consultants or suppliers is different from hiring them as employees. As employees working for the same company, you're all pulling in the same direction. You all want your company to prosper because everyone benefits. Family members working in other companies have different priorities, however. They're worried about their own businesses, not yours.


Patricia Schiff Estess writes family business histories and is the author of two books: Managing Alternative Work Arrangements (Crisp Publishing) and Money Advice for Your Successful Remarriage (Betterway Press).

Lessening the Potential Sting

Negatives aside, kin will be kin. And many family businesses rely on relatives for services and goods because of the trust factor. To insulate the personal relationship, you need to structure your professional relationship the way you would any business arrangement. Dashew and George Vozikis, a professor of entrepreneurial and private enterprise studies at the University of Tulsa in Oklahoma, offer these suggestions:

1. Begin by asking for references--and explaining why. Aunt Jane might be a good attorney, maybe even the best one for your business. But you should also share with her your fear that hiring her firm might risk the excellent relationship your family has with her, especially if business dealings get tense. Because you respect her input, ask her to recommend a corporate counsel. She'll either give you a third-party recommendation or suggest ways in which a good business relationship could be established with her firm.

2. Deal firm to firm. "Structure any deal you make as corporation to corporation, not as Joe to Jill," warns Vozikis. The relative might monitor the work or the transactions, but the daily dealings shouldn't be between the two relatives.

3. Structure a deal that's fair to both families. If you're going to use a family member's firm as a supplier, for example, draw up a clear written agreement that outlines what both of you expect. You might include that you want timely delivery, top-quality products, and fair market prices and terms.

The relative might want to include what he or she expects from a valued customer, which might include a definition of a "rush" order, under what circumstances he or she will intervene if there's a dispute between managers of the two companies, and what special treatment the purchasing family business can or cannot expect. Don't be surprised if the family member insists on the right to supply your competition. He or she won't want to be muzzled when it comes to expanding his or her business opportunities. You'll have to decide whether the expansion would hurt your business and, if so, what precautions you would have to take.

4. Don't put people from the other family's business on your advisory board. While Dashew thinks there is value in having family members who are businesspeople on your board, she's firmly against family members who are your consultants or suppliers holding those positions. "There's a conflict of interest there, and it won't work," she says.

5. Be aware of what you need at each stage of your business. Family advisors and suppliers might work well when a business is just starting up, as was the case for Josh, 27, and Seth Frey, 28, when they started their national gift-package company, Granny's Goodies, out of their parents' home in McLean, Virginia, five years ago. Their grandmother's granny-isms ("Spread the Goody word," "Be a smart cookie") were incorporated into their marketing campaign. Their mother, a legal search consultant and successful entrepreneur in her own right, counseled them on cash flow issues. Their father, an attorney, helped them with the trademarks and logos they needed. Their uncle, a high-powered executive, shared insightful business advice.

"I can't tell you how supportive our family has been," says Seth. "But now we're stepping from level A to level B, and we're ready for advisors who aren't so emotionally involved in our success. We have seven full-time employees and 10 to 25 who work for us on a part-time basis, as well as a warehouse facility. Our business has taken a different direction [than we originally intended], so we need to consult with people who have had experience in our [industry] and who know the direct-mail market."

Although the Frey family advisors aren't upset about being replaced, unfortunately, that's not always the case. Dashew suggests that when the time comes to move on to more sophisticated counsel or more experienced suppliers, you talk to your family advisors and put them in the role of emeritus. "Tell them how much you've appreciated and benefited from their counsel and assistance and that you'll always look to them for wisdom," she says. "But add that at this stage of the business, you need a different set of expertise and objectivity and that you know they're wise enough to understand that."

If you can remove as many risks as possible to the personal and business relationships, and if you both are honest about your goals and requirements, the kin-to-kin business relationship might work. "In those cases, they'll probably give you special attention," says Vozikis. Just keep in mind that it's not something that should be entered into without a great deal of forethought and discussion.

Contact Source

Granny's Goodies Inc., (800) 888-1638, http://www.grannysgoodies.com

The Human Side of Enterprise, (404) 252-7113, ldashew@aol.com