Best Practices for Successful Family Businesses

Every business owner faces internal struggles, but family-owned companies encounter some unique challenges, as they must balance business interests with their family relationships. Successful family businesses find that healthy balance by following these specific best practices.

1. Transparency and Monitoring. A common source of tension, sometimes leading to disputes, arises from family members who feel they are not kept adequately informed about the business. Often, those most involved in running the financial aspects of the business fail to share information with other family members who may be less involved. Corporate books and records, tax returns, contracts and other important financial and legal documents should be circulated to all owners of a family business. One recommended practice is to schedule quarterly meetings so that each owner has an opportunity to review significant legal and accounting developments and ask questions.
2. Written Employment Agreements for All. Family businesses tend to operate more informally. Typically, members verbally agree on each other’s general duties. However, that can lead to significant problems if there are disagreements over the details of someone’s role and responsibilities or dissatisfaction with how well individuals are doing their job. The best way to minimize this problem is to draft employment agreements for everyone working in the business which specify job duties, how performance will be measured and how compensation will be earned. Written performance metrics agreed to in advance provide an objective measure of whether family members are meeting expectations and serve to prevent accusations of unfair treatment.
3. Outside Accountant and Counsel for the Company. It is important to have unbiased third parties as advisors to the company. An outside accountant should be hired to compile and maintain financial records. Similarly, outside counsel should review and advise owners regarding legal issues. It is a good practice to have a regular forum where advisors can deliver reports to all owners and respond to questions or concerns by any one of the owners
4. Balance Family, Ownership and Management Rights. While each person has a familial role, those roles should not necessarily carry over into the business if the role does not correspond with the needs of the individual or the business. For example, just because there are 3 siblings in the family does not mean they should automatically have the same ownership and management rights, as each person may have different levels of interest in participating in the business or may be a better fit in certain types of positions, even though any such election might result in a higher or lower management position than other siblings. There are numerous ways to ensure fair treatment of family members without assigning responsibilities based purely upon family relationships.
5. No Absolute Employment Rights for Family Members. Family businesses naturally employ family members. However, giving family members an absolute right to work in the business or have a particular job can be detrimental to the company. Some individuals may lack the skills or personality to be in the position and bringing them in would result in their poor work performance as well as a potential loss of morale and productivity among other workers. Owners must be business savvy and put the business first.
6. Periodic Business Valuations. What the business is worth will change over time and it is a good practice to regularly update the company’s valuation. Circumstances can unexpectedly arise which require a valuation, such as when one of the Four “D”s surfaces: Death, Divorce, Disability, or Decision to retire. That affected owner, or the heirs, may need to be paid out for the owner’s shares in the business, and a valuation is necessary for the same. If no valuations have been done for a long period, there is a risk that someone will complain that the new valuation is biased. With a history of valuations, it is easier to establish that a recently performed valuation is presumptively accurate.
7. Conflict Resolution Mechanism. Disputes are inevitable. However, the best way to prevent them from disrupting the business or the family is to establish efficient dispute resolution mechanisms in advance. The most common ones are mediation and arbitration. In both cases, a neutral party is brought in to facilitate resolution. Further, mediation and arbitration have the benefit of being confidential. When family conflicts are made public, it can be damaging to the business’s reputation and finances.
8. Succession Planning. The purpose of a succession plan is to outline what will happen to an owner’s shares if an owner dies, becomes disabled, or elects to retire. Without a plan, heirs and/or co-owners could face significant financial and legal problems that could have been avoided.

Successful family businesses formalize the operations of the business. They are also open and honest with each other. Ideally, owners should turn to their advisors for help in structuring and operating the business in accordance with best practices in order to minimize problems.

If you have a family business, contact us for a consultation.