Sterling Terrell

recovering economist

In Business, Don’t Hire Close Friends and Family

In Business, Don’t Hire Close Friends and Family

[This is part of the series: 7 Tips To Make You Better At Business]

Another mistake that businesses should avoid like the plague is hiring the wrong person.

They say the hardest part of business is hiring – and keeping good people.

Whoever said that first was right-on.

A strategic mistake that so many people make in this is to hire a friend or family member.

I can, however, understand the rationale behind it.

“Why hire a stranger when cousin/brother-in-law Joe / Betty is looking for a new job or is going through a “transition”?  I mean, Joe was always a good guy. He used to run his own company before he moved on to something else. At least Betty is family – I know I can trust her.”

I submit – business and family (or business and friends) do not mix.  Priorities in one relationship are simply, more times than not, priorities in the other.

The tragic example I have seen play-out is the hiring of a close family member.

The family member – let’s call her Jane – lost her small business to bankruptcy and got into a bit of financial trouble.  Jane was then asked to come work for the company that her brother did business at and invested in as a large passive owner.

In no time at all, Jane was named President of the company.

Then, competition got tighter, margins got smaller, and the company began to bleed red.

In this, Jane thought the answer was that the company needed to grow its way out of financial trouble.

On dwindling profits, Jane opened a new branch office, hired additional staff, spent more on advertising a non-retail business, and used the company credit card liberally to entice customers (in an extremely sticky business).

In short, she did everything wrong.

You don’t hire family or close friends because in the midst of this train wreck – Jane’s brother is not letting business be business.

He is weighing his monetary investment by how much letting Jane go would hurt his relationship with his sister, or his wife, or his nieces and nephews, or his parents, or maybe even his potential inheritance.

You don’t hire family or close friends because if who you hire is incompetent, lazy, or stupid, you want the ability to easily fire them.

Try firing a family member. Life at home will never be the same again.

You don’t hire family or close friends because the whole thing is not worth it.

Let business be business – and let family and friends be family and friends.

In Business, Debt is Bad

In Business, Debt is Bad

[This is part of the series: 7 Tips To Make You Better At Business]

Businesses and the senior managers that run them need to treat debt as a path to be avoided.

In favor of debt, you will hear professors and analysts argue about internal rates of return.

This idea is best seen in a simple example.

What if I have a business, or project within a business, that can earn 10% per year on an investment.

If the cost of borrowing in the same example is (say) 6% per year – then one would say that this is considered “good debt.”

A 4% annual return can be earned through this debt and corresponding investment.

The problem is that this is not entirely true.

What is actually true is:

“A 4% annual return can be earned through this debt and corresponding investment – assuming nothing else changes.”

What if sales dip?
What if inflation ticks up?
What if technology changes your business or project?
What if a major customer leaves?
What if your largest salesman leaves for a competitor?
For this same reason, people make the same mistake with debt in their personal lives.“I can afford debt for a big house, a nice car, extravagant vacations, whatever.”

Yes – you can afford it – now – assuming you never get a pay-cut, you never lose your job, or you never have any large and unforeseen expenses. Otherwise, you are going to be like the others I have seen that trade in their car and sell their house at the first major hiccup with household income or expenses.

How many of us live paycheck to paycheck?

How many businesses are essentially doing the same?

I have told a story before about a small company that had around $30,000 in monthly debt payments after a major project fell through.  Income from the project went to zero – but the debt was still there.

The debt is now sinking the company.

You want to expand your business or buy something new?  Pay for it out of your pocket.

  • Debt restricts you.
  • Debt obligates you.
  • Debt ties you down.
  • Debt makes you beholden to another.
What is true for debt in your personal life is also true for business.
A good rule for both:  Avoid it.
Sterling Terrell