Small Business: Family business - Tony Falkenstein

Would you agree most NZ start-ups had some help- financial and practical - from family and friends?

It's very common on both fronts. In my case, I married Heather 32 years ago and she had her own house - she sold this and contributed some capital. My father-in-law lent me $200,000 for about five years, at 10 per cent interest which was a godsend at the time.

My parents died within a couple of years of me starting the business, and although their legacy was little, it certainly helped. My older brother also left his portion with the business, and he has retained 20 per cent of all the businesses and properties I have been involved in. My parent's small legacy - about $60,000 in total - has increased far more than 300 times over.

In terms of practical help, my wife worked in the business in a secretarial role for 12 years and my brother has been a mentor right through. For the first 15 years, my wife and brother and his wife were directors of the company. The biggest decision was whether they should continue to employ the CEO, being me, for another year. Unfortunately it took 12 years before we declared a dividend!

What kinds of help have you seen family and friends give small businesses in the early days?

Worst case scenario and one that is quite common is where parents give a personal guarantee to their children or children-in-law. Of course, when the business fails, the bank goes after the one with the most money, and that is normally the parents. This results in the parents living their later years in near poverty. In one case I know of, the father gave a personal guarantee to his daughter's partner, and to add to the family grief, the partner then left her when the business went sour and the father was left with the debt.

How should start-ups go about asking for family help in an organised way?

It's about making a profitable and sustainable business case. Just because there's kinship involved doesn't mean everything shouldn't be done on a professional basis.

Each party needs to have professional advice. The business plan needs to be clear and the division of responsibilities and rewards transparent.

I don't think it's a good idea for either party for parents to be asked to give personal guarantees. Parents are often a good source of loans, but they should be documented, and some interest charged. There can be a tax implication if no interest is charged.

Taking on your family as directors can be fraught with difficulty if they do not have governance or commercial experience. Similarly taking on family as staff members can be difficult. I have heard stories where family members have used their ownership to stop the management running the company efficiently. How do you fire a family member, is a big consideration when hiring them.

What can going into business do for family dynamics?

Family dynamics can alter drastically, especially if things go wrong. Often it means the family talk is all about work - many families have the discipline not to talk work during dinner or afterwards, but as a start-up this is difficult as you are living and breathing the business.

My best advice? Keep business talk for business hours but also set aside a set time for business discussions after hours - say an hour or so.

Anything else you would add?

Entrepreneurs' Organization (EO), comprises 'entrepreneurs only', with a turnover of US$1 million. This has been a tremendous factor in the growth of my businesses for a couple of reasons. Often on a day-to-day basis you can't see the wood for the trees. Second, being part of a peer group of entrepreneurs works wonders because they are always good at telling others what is wrong with their businesses.

Membership in one of EO's 120 chapters is by invitation only. Find out more at eonetwork.org

Next week: I am interested in hearing from businesses who have come out of a so-called dying industry and carved out a new niche for themselves, taking a different tack to reach a market which still wants a product. If your business fits this description please make contact..