Mind Your Own Business: Volume 1 Business and Family/Friends

Hey, it is mind your own Business Saturday where I answer questions about business related topics! I have a question from Alfred F. and I think there are lot of business owners who can relate to this.

How should entrepreneurs manage their money in terms of friends, relatives and other people you know come and ask you for help. How can I manage this thing as I am new in business?

A lot of business owners I?ve met over the years have had this problem. They work hard to start and build their business and then family and friends get wind of it and want in on the action.  Sometimes that?s a good thing because family friends that care about you are more likely to care about your business. Other times, it is a complete and utter disaster. 

I would  like to believe that most family and friends would have the best of intentions, but I?ve had both try to take advantage of me. 

One time I rented a house to an old friend of mine, and I know that he had the best of intentions, but life got in the way for him. I actually let him get six months behind in the rent because I?m a nice guy and he was my friend. 

I have also had family be the best resources and help for my business. When my brother and I opened our music store, our mother, father, and sister were our biggest supporters. When we needed help, and sometimes even if we didn?t they were there to help us. Dad was there almost every day, and it was amazing. 

The difference though is that they were there to help us, and not asking for help from our business. Oh, they got help from the business. Dad is a masterful sound technician and I was happy to pay him to help on our sound system installs, but he wasn?t there for just himself.  

So here is my best advice on dealing with family and friends in business, and how I would approach the subject today based on my experiences. 

First, I want you to get your mindset right regarding business finances. I don?t care if you are incorporated or sole proprietor, the money your business makes, is the business? money. Yeah, I know the IRS feels differently about it with a Sole Proprietor, but you shouldn?t. Money comes into the business and it is spent only for what makes the business work. 

So that means it pays you, it pays the company bills, and then it reinvests back into the business. At no point does it pay family and friends unless they are a part of the company bills (labor, rental agreements, product supplier). Having this mindset will allow you to separate your business finances from your personal finances. It?s a point of clarity that will help later in this discussion. 

A few years ago my wife had the urge to move back to the family farm. It is a working farm/ranch but it hasn?t sustained anyone?s livelihood in a generation or two. Both of her parents work outside the farm and her dad does all the farm work now that her grandmother passed, which was the cause for the desire to move. 

I make good money as a software developer, and there aren?t many IT jobs in the area so chances are I would need a remote position or we?re farming for income. I wrote up a business plan for the farm to show how it could make a decent income. 

It wasn?t long before some family members, cousins and such, wanted to get in on it. They were all in it with a real desire to help, and if we had gone through with the change (still may) their help would have been amazing. Having people we can trust help is awesome! 

The problem comes when people are trying to get something out of your business without adding value to it. I hope family and friends don?t fall into this category, but they certainly could. That could mean a job where they don?t put in the effort, or just out right asking for money because  you have a business. I?ve only experienced this one time from friends or family, but it came from one of the usual suspects so it was an easy decision not to. 

So what should you do? 

In regards to the business, you should treat friends and family like you would anyone who walked in off the street. If you have a job opening in the business where someone?s labor or knowledge would provide meaningful assistance, then you might consider hiring a friend or family member. I would recommend that you evaluate them exactly like you would anyone else, especially as a new business where every man hour or penny is so important. 

There is a bright side to hiring family and friends. Sometimes they care as much about your business as you do, and will go out of their way to protect your business. So the right family member can be an incredible resource to have. 

Now, I want you to know that a lot of professional business builders highly recommend against hiring family and friends because it becomes easy to blur the lines between business and loved ones. It can cause your other employees to feel less important, and it is possible for the family or friend to take advantage of the fact that you care about them, like my friend did that rented from me. 

I have also seen instances where a store manager or owner had to fire a family member, and that had serious implications for their families. So before you hire a family member ask yourself what will happen if you have to treat this person like every other employee and fire them for poor performance? Will it cause a great deal of family conflict? If so, I recommend not hiring them because you need to be able to treat every employee the same. 

If you do decide to hire a family member who is not one of the business owners, I recommend putting them on commission or basically a per gig. We often hired friends for large sound system installations to help move stuff. It was a way I could bless them with extra cash and benefit my business. If I didn?t like their performance on the one gig, I didn?t reach out the next time we needed help. (Okay, that didn?t happen, but it is what would have happened if they didn?t bring the value we needed.) 

Other than a direct hire or gig setup, I would recommend you keep business and personal (friends and family) separate. The money your business brings in should stay in the business, not as loans to people you know (unless your business is to loan money and then you should treat them the same as anyone else). If your business pays you a salary and you want to give them money out of that, that?s up to you. 

Your business is growing, and still trying to put down roots. Don?t risk killing it by taking away the nutrients (money) that it needs. If the business? expenses aren?t  adding value to your business, don?t spend the money. 

So how do you tell your family ?No, I can?t do that??

It could probably go something like this. ?Hey, I would love to help you out, but I?ve formed my business as its own entity and all money coming and going must be for the business.? Basically, ?I can?t give you money because it isn?t mine.? Setting your business up as its own entity, even if it is only a mental distinction,  is great like that, it gives you a way to divert people away from the business' success without telling them that you just don't want to loan them money and causing family issues. Handle it with love, compassion, and a clear line between business and personal money. That should help prevent family issues, but it is not a guarantee.

Then you could follow it up by actually helping the person by helping them to adjust their mindset and find their own path in the business world. Make it a ?teach a man to fish vs. giving a man to fish? scenario. That?s what I ended up doing with my friend that got 6 months behind on rent. I sat down with him and his wife and we built a budget and a plan to make things right. I showed them how they could change their lives, and they put in the hard work and made it happen.  

There is one final thought about charity.

We often had people coming into the store asking for donations to this or that. It is important to not only be in the community, but also a part of the community. When you can, budget for charity or advertising. It doesn't have to be right away, and don't exceed that budget. I recommend that you be the one to kick off any charitable donation. When they come to you, ask for materials, and let them know that you'll call them if you decide to donate. Don't make commitments on the spot.

Then pick the organizations that you want to support. I always tried to marry charitable donations with advertising. I mean you are trying to build a business. We had a retail music store, so we made donations to the band and choirs in our area because those were where our customers were. We'd advertise in their concert books and donate instruments and supplies to their raffles. We never did have anyone use one of our coupons we put in the books, but we did have a lot of customers from the school system. Most communities love their schools and they love businesses that donate to things like food banks. So we'd have a food drive and match or partially match whatever our customers donated.

Remember you are growing a business and every expense needs to be something that adds value to it. So when determining what charities to support and how to support them, ask yourself how will this add value to your business. I know, it sounds cold and calculating when we are talking about getting something out of a charity donation, but it's business. I consider charitable contributions like this advertising and it comes out of my advertising budget.

There is a great need for other forms of charitable giving where you won't get anything, even exposure out of it, and that's fine. I just don't recommend using business money for that purpose. Instead, use personal money. Later if your business is thriving and you have the extra throughput to donate without building your business, do it. Until then, keep the business money devoted to business expenses.

Good luck out there, and come hang out with me again as we Mind Your Own Business together. Feel free to submit questions and I?ll try to answer them!