Your client has come to you with a brilliant idea: she and her husband want to turn their love of cooking into a catering business. At first glance, there is plenty of upside — the two work well together and share the same interests and values.

The idea of going into business with a family member is not uncommon — about 80%-90% of Canadian businesses are family owned and
operated. But few people who embark on these ventures recognize the potential problems. What begins as an exciting endeavour with a husband, aunt or sister can turn sour if not properly planned.
Financial advisors can steer clients in the right direction.

“An advisor’s role is to alert clients to the issues involved in running a business, and particularly the issues inherent in going into business with family,” says Christine Van Cauwenberghe, director of tax and estate planning at Investors Group Inc. in Ottawa.
“A lot of people assume that if something goes wrong, they can work it out. But, in my experience, the bloodiest battles are among family members.”

The most common mistake, she says, is failing to define specific roles and duties in the business plan. Van Cauwenberghe advises even the most business-savvy clients to consult a lawyer who specializes in owner-managed businesses. A lawyer can help the draft a shareholder agreement that ensures the organization is properly structured and sets out who is responsible for what.

“The clearer they are about all these things before entering the business, the more likely they are to be successful,” says Luanna McGowan, national partner at
PricewaterhouseCoopers LLP’s centre for entrepreneurs and family business in Toronto. The centre specializes in family businesses and acts as a facilitator among business owners to help them identify and work toward their objectives.

McGowan uses the acronym “ARA” — for “authority, responsibility and accountability” — when talking about family-run businesses. “Who has authority over what?
Who is responsible for what? Who is accountable to whom?” she asks.
The agreement should also outline a procedure for dealing with the “four Ds” — divorce, death, disability and disagreement. Each scenario will have an impact on the business, and it is vital to have in place a written policy detailing a course of action before such an event occurs. A lawyer can outline what happens in the event of a marital breakdown if the business partners are spouses; in some provinces, businesses are sharable assets; in others, not.

Another source of discord in family businesses is who should be allowed to join the business. Should the owners give, say, a cousin a job because he was recently laid off from work? What about a retired aunt or uncle looking for part-time work?

McGowan encourages clients to have a “family participation plan,” which sets the basic guidelines for entering the business.

For instance, the plan may state that only those with relevant work experience or education are eligible for positions, regardless of their relationship; or that a family member may be permitted to enter the business provided they perform according to clearly stated expectations.
“What the FPP says is: ‘Here is the criteria for entering the business.’ It’s in writing,” says McGowan.

Failure to put things in writing is a common mistake among family business owners, who tend to make important decisions around the dinner table or at other casual gatherings. Any and all decisions should be carefully documented, says Van
Cauwenberghe. When a question comes up about salary expectations, for instance, business owners can refer to a written document that states what was agreed upon.

Once the business is off the ground, there are several ways to ensure your clients’ finances are properly protected. The first is adequate insurance coverage.

“There are a number of situations in which people have put money into a business, and the business may be a cash cow, but if they were to die or become disabled, the business would lose a lot of its worth,” says Van Cauwenberghe.

Key-person insurance covers the cost of replacing a deceased or disabled top executive or partner without whom the company would lose its value. It allows the company to hire a new person to replace the lost skill set. There is also corporately owned life insurance, which safeguards the value of the deceased’s shares so there is money available for the surviving partners to buy out the deceased’s heirs.