Family Business Law is Not Family Law: Handling Management and Legal Challenges in a Family Business

Unlike family law that deals with issues such as divorce, child custody and alimony, family business law deals with the issues associated with starting, growing and transferring your business. However, there really isn’t an official area of law called “family business law”. It includes practice areas, such as general business or corporate law, real estate law, trusts and estates, securities, and often family law.

The management and operation of a family business involves many challenges that traditional businesses rarely face. These challenges include, among other things, dealing with the possible termination of an underperforming employee that also happens to be your mother, father, husband, wife, son, daughter or nephew, effectively running a business when a marriage is falling apart and how to run a business when the founder is looking to step down and his heirs are not interested in running the family business.

Some of the issues that need to be considered and addressed are day-to-day challenges, and some are part of a long-term strategic process known as transition and succession planning.

In connection with the day-to-day management of the family business, the leader or head of the family business is often required to separate issues of ownership and wealth from issues of management and control when developing a business. The founder is tasked with considering the current business from many perspectives including sons and daughters joining the business, siblings who do not enter the business, the spouses of the founder’s children and the founder’s employees. For all of these groups, there are issues of career and financial planning, career opportunity and career satisfaction, fairness of treatment by the founder, family relations and often, unfortunately, politics and greed.

Thus, family business owners and operators must view their roles as a responsibility to the founders as well as to future generations. The preservation of family wealth is in the continuity and proper management of the business.

Succession planning in a family business is complicated because each family member may feel that he or she has a vested interest in the company’s future. They may also feel entitled to some level of participation or involvement in the business.

There are several key steps that should be taken to assure the effective operation of the family business and set the stage for a smooth transition in the future. These steps recognize that any successful transition is a process that will take time. Some of these steps include:

– Preparing an Organization Chart With Defined Position Descriptions. Determine now which family members (and non-family members) will hold which positions, with clear statements of duties and responsibilities, as well as the performance goals to which they will be held accountable. In assigning positions, be guided by merit, education and commitment, not by love or nepotism.

– Training. Set up a system for training, coaching and formal mentoring so that the current generation of leadership can begin to impart knowledge, experience and trade secrets to the next targeted generation of leadership. The training should be structured as a mix of formal classroom training, field experience and informal training at social or family events.

– Seeking Good Advice. One of the keys to peaceful current management structures, as well as an eventual smooth transition, will be driven by the quality of the advice and input that you will get from your professional advisors, such as your accountants and attorneys, who should be experienced with the succession planning and transition management needs of closely held and family-owned businesses. You should consider having a Board of Advisors, made up of outside business leaders and professional advisors who can help the company with difficult transition management decisions, as well as with the implementation of the transition management plan.

– Establishing Corporate Governance and Communication Structures. Many well-run family businesses anticipate succession issues well in advance and create a culture of genuine interest and involvement early on by creating a “Family Council” or even a “Family Assembly” depending on the size of the family. These non-traditional governance and communications groups may have certain protocols or by-laws (or even a constitution), which leave key decisions to be discussed and even voted upon by affected family members in a manner which augments and supersedes the traditional decision-making structure set forth in typical state corporate laws. These group-developed core principles will assist in the selection of the next generation of leadership. For example, once the vision for the family business is articulated, the Family Council then has a better idea of the types of future leaders it needs to begin to develop today.

– Communicating Often. The current generation of leadership must constantly communicate with the next generation, sharing information and imparting knowledge, not only to build trust, but also to evaluate goals and get a feel for the outlook and thoughts of the next generation of family business leaders. The communication channels should be established and kept open throughout.

– Encouraging and Even Recommending Initial Employment Outside of the Family Business. The traditional approach has been to require that the next generation starting as teenagers, work their way up the ladder and eventually retire as family business employees. This is quickly disappearing. A better approach may be to support and encourage a career track that includes employment outside the family business, which may be within or outside the family business’s underlying industry, with the possibility that these family members will return to the family business at the appropriate time.

Family businesses are still businesses. Therefore, it makes sense for the family members to memorialize their understandings in order to clarify expectations. You can use a number of agreements, such as a Shareholders Agreement, an Operating Agreement, a General Partnership Agreement, a Limited Partnership Agreement and more.

As part of any agreement that is utilized, a few important provisions should be:

Buy-sell and transfer provisions. These clauses will explain what happens to your family business in the event of a disability or death of one or more family members. These clauses will also address and in many cases prohibit the transfer of interests outside of the family

Valuation provisions. These clauses will be used to determine the value of the business in the event of a transfer.

Corporate governance. These provisions will set forth the manner in which the family business will be managed now and in the future.

Sadly, the many litigation cases involving family businesses that have been filed demonstrate that agreements, even among family, are necessary. At a minimum, the family members can clearly state their desires and vision in these legal agreements.

In summary, although running a family business may seem like the most natural thing in the world, it may also become the most unnatural. If it is handled, it can create wealth, deepen relationships and provide employment for future generations of family members. If handled badly, it can break up families and lead to legal disputes.