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family preparing food in the kitchen, representing how to create a Family Charter

How to Create a Family Business Charter

Unique challenges tend to arise when a family controls a business. Some questions that may emerge are:

  • Which family member will lead the business?
  • How will profit distributions be decided?
  • How can a family member exit the business?

Questions such as these are best handled in advance and through many discussions among family members. It may also be helpful to create a Family Charter to help answer some of these questions. A Family Charter, sometimes referred to as a Family Business Constitution, is a written agreement among family members regarding shared business values, ambitions and business management strategy.

Why is it Necessary to Create a Family Charter?

Owning a business can be a valuable asset for a family, and not only because of the economic benefits. A family business can provide educational and personal growth opportunities for younger family members and create unique opportunities to strengthen family cohesion and create a family legacy.

But a family business can also generate tensions within that family. Siblings, cousins and spouses may disagree about how the business should be run. One family member may have a greater or lesser need for personal cash flow and thus favor increased profit distributions or retention of profits to enable future growth. When it comes time for an elderly family member to retire from the company, the “politics” of choosing a successor can be controversial and even damaging to the family at large.

Many families create a Family Charter to codify the answers to such questions. More importantly, Family Charters document the method by which answers will be determined, since it is hard to know what questions may arise in the future. As challenging situations present themselves, a family will benefit from having a Family Charter to guide them in making difficult decisions.

Possibly the greatest lasting value derived from a Family Charter is family communication,  which is necessary first to create the Charter and then to keep it current as the family (and business) grow and evolve. Indeed, for larger families or those with complex situations, it is recommended that a formal ‘family meeting’ or series of meetings be held, which are in some cases facilitated by counsel. Moreover, a Family Charter will often mandate regular family meetings (say, annually) to help drive family communications and build family bonds and trust.

In the context of a family business, family communication means involving everyone in the information flow and discussions around the intersection of family and business. The Family Charter may help families talk through actual business events such as increased or decreased profits in the business, top-level hiring decisions, core business strategy, M&A and large business investments. Harmonious family communication starts with consistent and understandable information that flows from the business to the family. By contrast, a lack of transparency about the state of the business can engender a lack of trust between individuals and between branches of the family. This has the potential to damage both the business and the family.

What to Include in a Family Charter or Family Business Constitution

The following are topics you will likely need to include when you create a Family Charter of your own:

  • Board Makeup: How many and which family members will sit on the board? How many independent directors should be on the board and how they will be selected? Will non-family shareholders (such as management, current and previous employees and an ESOP) have representation on the board? Which board committees should include family members?
  • Family Hiring: Under what conditions can family members be employed in the company? How will they be managed and compensated?
  • Business Succession: How will senior management (particularly when family members fill such roles) be replaced as they retire?
  • Profit Distributions: When and how are profits distributed? Under what conditions can the company retain profits to fuel increased growth? How should cash flow needs of individual family members (or entire family branches) be addressed when they differ from the needs of other family members?
  • Shareholder Liquidity and Exit Rights: When and how can members of the family sell portions of their shares? What is the mechanism for a family member to sell all shares and/or exit the family ownership of the company?
  • Family Meetings: How often should they be held and which business questions should be addressed by the entire family?

Specific answers on these topics may be helpful to include in the Family Charter, particularly as representative examples to guide future generations.

Additional Topics of Conversation and Uses for a Family Charter

A Family Charter should be broad and general in nature and should contain guidance on how to come to an answer on a particular question. Often such guidance will be about communications, voting rights or decision-making since the world will change and the family and the business will evolve in unexpected ways. A “living” Family Charter that can evolve over time is likely to be more effective in future decades, and it can help to prevent mistrust among family members.

Once written and agreed upon, the Family Charter should not languish in a drawer or on a bookshelf. Take it out regularly, perhaps annually, and review it for current relevance. The Charter can create mechanisms whereby younger family members are made aware of the Family Charter and how it works. Such communications to younger family members might start in their mid- or late-teens, but how and when to start may be a decision best left to parents, with some guidance within the Family Charter itself.

Similarly, spouses can give rise to especially complex communications challenges. They should be included in family communications, and the Charter may specifically address when they should be pulled into the loop. A Family Charter might also recommend that participants request pre-nuptial agreements, or that spousal codicils be written in parallel to internal family agreements and trusts.

Family Charters can also help to create family traditions and rituals, such as a regular party; vacation; the creation of documents to record the history of the family and its business; or the preservation of family artifacts such as trinkets, equipment, houses and factories that have been instrumental in the family’s success. Preservation of such items can propagate the principles and values important to the family. The history of the family can exert a powerful influence upon distant-future descendants that helps them build happy and successful futures.

The above topics are a great start for discussion, but an effective Family Charter is as unique as the business and the people it serves. Be sure to talk to family-business owners and  peers about if and how they have used a Family Charter, and seek experienced professionals to help you create a Family Charter of your own.

[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Common Issues and Strategies in Business Breakups and Building an Independent Board. This is an updated version of an article originally published on February 11, 2019.]

©All Rights Reserved. July, 2020.  DailyDAC™, LLC d/b/a/ Financial Poise™

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About Pierre duPont

Pierre is an active mentor and investor in new and growing companies; a private banker and family wealth advisor for individuals; a strategy, finance and management consultant for mid-sized businesses and their owners; and a semi-retired entrepreneur. In his role as a Partner at Cerity Partners in New York City, he provides a variety of…

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