Family financing can help or hinder

Dad paid the first month’s rent for his office. His first company car was a station wagon, and he plugged away at growing the business while living off his wife’s teaching salary.
Looking back, Raymond Cherenzia, founder of Cherenzia & Associates Ltd. in Westerly, would not change a thing.
“Little by littlen I planted the seed,” Cherenzia said of the company he founded in 1979, which now employs 25 people.
While running his company, Cherenzia also helps with the family business, Cherenzia Excavation, also in Westerly, which is run by his brother Salvatore “Sam” Cherenzia, it’s second-generation owner.
The brothers have relied on each other for new business and even for creative ways to make payroll. For a long time they stayed away from outside financing for fear of getting in over their heads with debt. And borrowing from other family members didn’t seem much better.
“I was always afraid to do that,” Raymond said. “I didn’t want that hanging over my head and worry about having to pay it back, and I didn’t want to show … weakness.”
William O’Hara, founder of Bryant University’s Institute for Family Enterprise, said there are pros and cons to investing in a family business, and all parties need to make their decision very carefully.
The first rule, according to O’Hara: is document all decisions. Be sure there is a promissory note entered into and executed by all.
They also need to be aware that any kind of loan or investment includes risk, he said. It’s something that is generally understood in business, O’Hara said, “When you bring family into it, there are relationships.”
The borrowers need to know that there may be emotional ties to an investment from a family member who may be putting up their retirement fund or life savings. And the family must be aware that they could lose the investment .
For many entrepreneurs, family financing is the way to go because it’s more accessible – a parent or sibling is likelier than a bank to provide money for a startup. And family members are also likelier to be more flexible and patient.
“Shareholders of a family business will travel the ups and downs and are willing to see that company go up and down, versus the CEO of a Fortune 500 company that has to watch the stock,” said Michael McGrann, assistant director at Babson College’s Institute for Family Enterprising. That can make family-backed businesses more profitable, because their leaders can focus on long-term returns.
Return on capital in family-run businesses is 18.5 percent versus 12.6 percent for public companies, according to McGrann. And family-owned businesses’ annual returns to shareholders are 16.6 percent, compared with the Standard & Poor companies’ 14 percent.
For Matthew Zimmerman, co-founder of Providence-based FarSounder Inc., a provider of 3-D underwater sonar technology, having friends and family investing provides a positive challenge.
“For me that provides a lot of motivation,” said Zimmerman, whose mother, Cheryl, runs the company. “It is my job to be sure that they made a good investment.”