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A Strong Constitution for a Strong Family Business

More and more family owned businesses are adopting a family agreement or family constitution. There are several reasons for this including keeping the family united as the business expands, keeping the ownership of the business united and putting shape on the next generations expectations for their roles in the business as future owners.

Agreement

The content of the agreement can be as basic or extensive as a family wishes. At its most basic level it must include sufficient detail to guide the family through important decisions into the future. The family agreement should address the following:

  1. How to address conflict or issues
  2. What needs to be included in the agreement
  3. Why the family wish to address future issues
  4. Who is to be included in the decision making
  5. When to review and update the agreement

A family agreement usually provides clarity on several issues.

Where to start?

The process of forging a family agreement can be as important as the agreement itself. It takes time and must not be rushed. The actual process of developing the family agreement builds family decision making and problem-solving skills.

It is worth noting that a family’s orientation – business first or family first shapes the content of the family agreement along with size of the business determining the level of detail.

There will be problems that a family agreement cannot solve. A family agreement is not the way to address old conflicts or emotional wounds, rather these matters should be dealt with by counselling.

Typically, family agreements set out in the early part the core values and wishes of the family. The family wishes may be both present and future. This can be split into family values such as discretion, discipline, unity as a family and commitment to the company. They may too have goals in their business such as competitiveness, commitment to excellence in service or product and a desire to be the industry leaders.

The next part of any agreement will include control issues such as employment, ownership, and governance of the business and governance of the family. If these principles are agreed then you have a real solid base for now developing policies, which details the “how” in practice the principles come into effect. An example being if a family member wants to join the family business, the policy may be that they must have a college degree, have worked externally for approximately five years and must bring a skill set or be prepared to learn one that the business needs.

External Objectivity

It will be important to engage an advisor in drafting an agreement as families find it difficult to facilitate this process. Family business tend to find that an outside voice will bring objectivity, independence and a balance to any meeting in discussing sensitive matters which will shape the family and the business into the future.

Timing

There is no set timeline for how long it typically takes for a family to develop its family agreement. While every family is unique in my experience it can take three to six months. During the process it is important for the family to reflect and consider the agreement so that there isn’t a feeling like it is being rushed through. The process of drafting a family agreement is the essence of the agreements success.

Finally, I would recommend putting a clause into the agreement that it is reviewed and perhaps revised every five years.

My advice is talk to an independent professional in confidence and put an agreement in place to ensure clarity, honesty and longevity of the family business.

For more information, please contact me, Kieran McCarthy at kieran.mccarthy@bakertillyhb.ie