There’s a scenario which crops up quite often when we’re talking with people new to running their own business. We’ll be trying to explain something quite well established say, for example, the basic rules covering the treatment of travel expenses in their personal tax returns.

Our new client listens for a few minutes but then interjects with "My brother-in-law says that I can claim for all my travel from home; he’s been doing it for years and he’s an accountant". And suddenly we know that we have a battle on our hands to maintain their attention. Eventually, after asking some polite questions, we realise that the person to whom they’re referring doesn’t actually work in ’accounting’ or ’law’ or any other recognised professional business service organisation. Their alleged expertise originates from having studied ’business’ at school or college (most likely many years ago), followed by various attempts at small business ventures. Welcome to the informal or amateur financial advice-giver.

tact and diplomacy

It can be quite frustrating trying to persuade a new client that the advice they’re being given at home is wrong. And it takes a certain amount of diplomacy to gently convince clients to ignore advice which could land them in big trouble. But, according to a recent survey by Sage One, it must be happening to many other professionals, since they found that 10% of small/medium business owners, which works out at around 400,000 businesses, still prefer to obtain their business advice from their families at least initially.

We certainly notice it at EKW since we see hundreds of new-to-business clients every year. Maybe that’s why each of those business sectors is one which involves a great many new start-ups each year; and the vast majority of these new entrepreneurs have never run their own business before. They’re using savings, redundancy pay-offs and, frequently, family loans to start their own first venture. And if you’re borrowing money from your family, or actually putting the family home on the line to fund your business, the family will naturally expect to have some ’say’ in how you run it. Even if they really don’t know any more than you do.

lack of financial awareness

The real issue, of course, is that many individuals recruited into these types of business ventures don’t have much business experience, or even just financial awareness, to start with. And if we’re blunt, some of them don’t receive a great deal of help in this respect from the organisations that are recruiting them. The really well known national petrol/pub/franchise chains tend to be better in this respect. They require potential new operators to prepare a business plan and to show that the operator actually understands that business plan at least to some degree.

Many of those organisations run intensive induction training for new starters, at least part of which will cover the basics of finance and accounting requirements and in the best cases that includes presentations from accountants, bank managers and other finance professionals. Unfortunately, there are many organisations which don’t provide that level of training for new recruits. That’s because apart from being seen as expensive, many new networks are growing very quickly and their priority is to fill the available business spaces and worry about the results later.

well intentioned

The result is that there are many nervous operators out there who receive their first ’business advice’ from the only people they know friends and family. That advice is undoubtedly well intentioned.

Unfortunately, by the time the client has passed it on to us (and often they haven’t really understood what they were being told by their friend or relative in the first place) what we hear could be described as ranging from: ’Interesting idea, but do you really wish to end up being a test case in the House of Lords?’ to ’That may have been legal in the 1970s but today will land you in prison!’. And frequently the latter example is at the nub of the problem much of the advice that is received from family or friends is simply out of date. It refers to business practices, tax rules or Companies Acts regulations that were applicable 10 or 15 years ago.

legislative changes

Whether it’s tax rules, regulations affecting company directors, or employment law (particularly employment law), the legislation seems to change every time a Chancellor stands up to deliver yet another Budget speech. Even those of us whose job it is to keep up to date in each of these fields sometimes struggle to keep on top of these frequent changes, so it’s hardly surprising that non-professionals or ex-professionals can be many years behind.

Of course, there are occasions when the family influence works the other way to put the brakes on something sensible that the new business operator actually wants to do with their business (and beyond it) over the next few years. We may have sat with a new client and drawn up a long-term structured plan that could save them a lot of tax liabilities, or make eventual handing over of the business easier, probably both.

The client seems happy and understands that there’ll be a short-term extra cost in return for long-term gain. They go home, discuss it with their family or friends, and the next thing we know they come back with doubts. The informal advisors suggest that the operator (or we) are thinking too far ahead. They should walk before they run, they say. And why are they paying the accountants to set up now something which will only come into play in one or five years time? Again, it takes a certain amount of tact to persuade the client that their original intentions were sound without becoming responsible for a family row.

By all means discuss your business with family and friends, but always seek professional advice before committing to anything.