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FAMILY BUSINESS CONSTITUTION

It’s very difficult for any business to function successfully without a clearly-defined set of ground rules. In a family-owned business, these rules, which are commonly referred to as a Family Business Constitution, provide guidance and define the manner in which your business functions. A Family Business Constitution is an invaluable formal agreement that creates a binding contract by which all family members must abide.

AGREEMENTS TO SECURE & PERPETUATE YOUR FAMILY AND YOUR BUSINESS

Professionally manage family businesses are recognising the importance of adopting Family Agreements for several reasons:

  • To keep family ownership united and to forge a broad and strong owning family's commitment to the future of the family's business.

  • To give the family business a strong foundation and to build the confidence of non-family managers and business partners.

  • To shape next-generation expectations for their roles in the business and as future owners.

  • To keep the family together, preventing conflicts over unnecessary misunderstandings.

FUNDAMENTAL COMPONENTS OF A FAMILY AGREEMENT

The second generation of a family business in Latin America was considering the future for the eight cousins of the third generation.

Several questions were making demands on the family business's leadership:

  • What are the rules for next-generation family members to work in the business?

  • Is the family committed to next-generation business involvement and ownership, and if so, why?

  • How does the family make decisions?

  • How can the family educate themselves to address these subjects?

  • Who should participate in the educational process and decision making?

  • Is it more important to rely on the family's values and past experiences? Or is it better to set clear rules?

  • If family members are expected to pursue higher education and outside work experience, can we still expect them to start at the bottom of the company as past generations have done?

  • Will we need different compensation systems than in the past?

  • How do we keep family shareholders who are not working in the business involved?

  • What if a family member wants to sell his/her shares? Our business articles of association have not been reviewed since the business began. How do we proceed?

A Family Agreement address these questions and many more.

WHAT SHOULD BE INCLUDED IN OUR FAMILY AGREEMENTS?

Family Agreements can be as short as a one-page description of the family's values, mission and vision, or as long as fifty pages of polices and contractual stipulations. The intention of any Family Agreement is, guide the family through important, possibly even contentious, decisions into the future.

To do so, some families rely more on philosophy, other lean more on principles and many believe they benefit greatly from precise policies. It is also valuable to consider who the parties to the Family Agreement are. Is the agreement for all family members or only for those who are shareholders?

A Family Agreement should address the following issues:

  • How to resolve specific family business issues.

  • What to consider as key elements when making present and future decisions.

  • Why the family wishes to address future issues.

  • Who is included in decision-making and who the decisions affect.

  • When to review and revise the agreements.

FAMILY AGREEMENTS

Family Agreements can be very different in form, content and even names and may be referred to as family charters, contracts, protocols, codes of conduct, statements etc. Given the variety, we find it useful to think of types of Family Agreements. Each has a distinctive focus and perspective:

 

FAMILY STATEMENT

Provides a philosophical set of views of what is important to the family (i.e. values statement, family mission statement and vision).

 

FAMILY BUSINESS PROTOCOL 

Defines the formal policies of family interaction with the business:

 

  • Family decision making / governance policies

  • Compensation / performance evaluation policies

  • Employment policies

  • Codes of conduct

SHAREHOLDER'S AGREEMENT

Specifies the legal understanding among shareholders (i.e. buy-sell agreement, redemption process, dividend rights, etc.)

 

The Family Statement has a primary focus on the welfare of the family as a family, while the Family Business Protocol considers the interests of the business and the Shareholders Agreement protects the rights of owners.

CREATING A FAMILY BUSINESS CONSTITUTION

IS NOT ALWAYS A SIMPLE TASK

Some family businesses have little difficulty creating an effective Family Business Constitution, whereas others endure great struggle. Enlisting help from an outside advisor such as Family Legacies can be beneficial for creating a draft of a constitution. A consultant, with extensive experience in assisting family businesses in creating a Family Business Constitution, can also serve as an effective mediator when disagreements arise while developing business ground rules, goals and other conditions that will be included in the document.