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 the questions, which should provide mechanisms to address future questions as they arise.
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 also unique opportunities to strengthen family cohesion and pass a motivating heritage down to future generations.
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 which younger relative succeeds can be controversial and even damaging to the family at large.
[Editor’s Note: Check out “Family Governance is not Business Governance,” and “Always Balance Family and Business in a Family-Owned Business,” both by Bruce Werner].
Many families have used 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 as they address the situation.
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 business and the family-business intersection. 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 investments the business may make. Harmonious family communication starts with consistent and understandable information flows out of the business to the family. By contrast, poor communications within a family can engender a lack of trust between individuals and between branches. This has the potential to damage both the business and the family.
A family charter is likely to include sections detailing each of the following topics, and more:
Specific answers on these topics may be helpful to include in the family charter, particularly as representative examples to guide future generations.
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.
[Editor’s Note: For more information on family business succession planning, read “Study Finds 4 of 5 U.S. Family Business Owners Lack Adequate Succession Plan” and “The Importance of Succession Planning for a Thriving Family Business”].
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 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 or vacation or the creation of documents to record the history of the family and the family business, or the preservation of family artifacts such as trinkets, equipment or even houses and factories that have been instrumental in the success of the family. Preservation of such items can be helpful to 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.
[Editor’s Note: If interested in more information on this topic, check out “Family-Owned Business Transitions: The Good, the Bad and the Ugly”].
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-owning peers about if and how they have used a family charter and seek experienced professionals to help you create your own.
Pierre duPont is a Partner at Cerity Partners LLC, an SEC-Registered Investment Adviser. Cerity Partners’ services may not be suitable for everyone. The information contained herein should not be construed as personalized investment or legal advice. There is no guarantee that the views and opinions expressed in this brochure will come to pass. Before making any decision or taking any action that may affect your family’s finances, you should consult a qualified professional adviser. The information presented is subject to change without notice. For information pertaining to the registration status of Cerity Partners, please refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).
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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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