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Keeping the Business in Family Business

Jun 20, 2022

Managing the “family” part of a family business can be complicated — especially as your family continues to grow. Multiple generations mean added challenges, from ambitious siblings competing for a position to the older generation crusading against health and succession issues. Mix in marriage, divorce, children, and more children, and suddenly the family business is much different than it was when the founders started out with just a good idea and a lot of hard work.

Keep it Respectable

To keep family problems from becoming family business problems, it is wise to have a formal policy and/or agreement in place, such as a:

Shareholders’ agreement. The shareholders’ agreement addresses what will happen in the event of the death, disability, or departure of a shareholder. Families can write language into a shareholders’ agreement to prevent the possibility of non-family “in-laws” becoming voting partners in the business.

Prenuptial agreement (or prenup). A prenup can work in conjunction with a shareholders’ agreement to prohibit non-family partners from becoming voting partners. For instance, a company’s shareholders’ agreement might stipulate that in order for a family member to remain a voting shareholder, he or she must sign a prenuptial agreement with the spouse-to-be. Making the prenup a standard requirement helps to prevent hurt feelings by making it clear from the start that such an agreement is part of the deal and applicable to everyone.

Will. A will can alleviate any questions about what happens to company shares if a shareholder passes away, making a will especially helpful in the case of second or subsequent marriages. For example, if a shareholder has children, marries a spouse with children of his or her own, and bears more children with the new spouse before passing away, then the estate can get messy. However, if the shareholder has a will in place, then it will likely mitigate potential disputes.

Trust. For family members with special needs, a trust can protect assets, including company stock. Having a frank discussion with financial advisors should help business owners find options for taking care of relatives with disabilities, addiction problems, or other issues.

Incorporate Family Employment Policies

Another way to keep the “business” in “family business” is to create employment policies that set clear expectations for family members. A written policy allows shareholders to act objectively and leaves little room for accusations of favoritism. Solid family employment policies address the following:

Education. Specify the type of training or education required of family member employees. If the family business is in an industry that requires certain licenses or degrees, then consider establishing that family employees must earn degrees and pass licensing or board exams within a certain timeframe.

Work experience. Many businesses require that family members work elsewhere for a period of time before they are allowed to join the family business. This requirement gives young relatives a chance to develop good work habits, see how other companies are run, and prove themselves on their merits rather than only on their names.

Career path. Integrating family members into the business can be challenging. A good approach is to rotate family members through different areas so they can get a big-picture look at how the company runs. Other family businesses start everyone in entry-level jobs and expect them to work their way up to the management level. Some family businesses even assign non-family mentors to help groom young relatives for executive positions.

Compensation. Most compensation specialists advise offering a combination of a market-based salary with ownership opportunities to family employees when appropriate. This approach helps those employees realize that their value to the company is based on job performance rather than on bloodline. At the same time, it helps to ensure that wages are fair across the board – and, in turn, helps keep valuable non-family employees content. By contrast, ownership benefits issued through dividends and distributions reward relatives for their place in the family and do not need to be tied to employment.

Fringe benefits. Perks such as club memberships, vacations, use of company vehicles, and family-friendly loan arrangements should be carefully spelled out.

Carefully Managing Your Family Business

As you draft family agreements, keep in mind that what you do for one family member sets expectations for all. Creating such policies can be difficult, but it is often better to have them in place than to have a court decide what happens to shares of the family business. Speak with your CRI advisor if you need guidance in carefully managing your family business.

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