Be prepared. In business, a best practice is often to be overprepared when it comes to legal documents for business matters. But, when it comes to legal documents for families and their family-run businesses that mantra is even more important. Because family businesses are run by loved ones, they often become relaxed on the types of business legal agreements that should be in place.
To begin creating and protecting family documents, here is an overview of the top four legal documents your business needs to have.
A Buy-Sell Agreement or Shareholder’s Agreement
A buy-sell agreement or a shareholder’s agreement is critical for directing and controlling the ability of shareholders to transfer their shares or equity ownership. This agreement is even more important to family businesses considering most families wish to keep ownership within the family.. A shareholder’s agreement is an important business agreement to have as a legal basis for restricting a transfer outside of the family while also managing the transfers within the family.
Depending on the complexity of family business agreements, this document can be as simple as outlining the families’ desires in just five to eight pages or as lengthy as fifty pages or more. A successful buy-sell agreement will outline the proper steps a family should take in the case of retirement, death, divorce or a family member simply wanting to leave the company.
A Family Business Employment Agreement
Of course, family businesses often employ family members. This simple fact can not only blur familial lines and relationships but also affect expectations and relationships at work too. Moreso, by not implementing a standard for expectations and qualifications for family employees, business leaders often will alienate non-family employees too. So, a family business employment agreement is our second most important legal document that you should have for the health of the business and the health of the family.
To create a level playing field for family members and non-family member employees, here below are a few examples that family businesses should consider including in their family business employment agreements:
- Require family members to get a specific number of years in experience or education before becoming an employee of the family business.
- Implement a system of internal reviews for family employees to avoid any perceived special treatment.
- Outline additional opportunities and endeavors for family employees (like continuing education, etc.) when these members may be expected to take leadership positions down the line.
A Corporate Governance Checklist
You might be shaking your head saying, my family business doesn’t need a corporate governance checklist – we run just fine day-to-day without all the procedural nonsense. But, when it comes to a transfer of ownership or an unexpected succession of generations, you will want to be sure that your plan is both well-documented and understood by your key people and family members. A corporate governance checklist does just that and keeps your business accountable to keeping clear records if a legal issue ever does arise. In general, corporate governance checklists outline guidelines for holding board and shareholder meetings, keeping minutes, and records.
Most family businesses will use the help of a lawyer or business consultant who has been involved in these types of legal issues. In that case, you will have a real-life perspective on what could go wrong and how to avoid it from the beginning with a family business operating agreement. By drafting this important legal document now, you can potentially protect you, your family, and your business later. Internally, a corporate governance checklist also can improve communications, streamline operations and provide security against claims of improper management or behavior.
A Succession Plan
Last but not least is having a sound, secure and legal succession plan in place – it’s a hot topic among family-run businesses. Why? Because nearly 70% of family businesses fail or succumb to a sale before the second generation takes over. So, if you are committed to the business staying in the family, a succession plan is by far one of the most important legal documents for families to have.
Even if you are having a problem thinking of or deciding on a successor, this is not a topic you will want to put off until it is too late. It is important to outline transition actions legally and to project the future and success of your business especially if an unexpected or untimely death or accident arises. Include the following considerations:
- Will succession include the transfer of leadership, ownership or both?
- What type of time frame will succession occur?
- How will succession affect the role of older generations?
Ensure Success for Your Family Business
A family-run business is no different than any other business. Just because you love the ones you run the business with doesn’t mean you shouldn’t have legal family business agreements in place. In fact, important legal documents are just the start. To encourage and protect the long-term success for your family business you should be proactive at developing sound foundations for strategic growth.
In today’s ever-changing landscape, family businesses are leaning on expert advice more than ever. By connecting with a family business consulting group you can successfully leverage current success for a stable and prosperous future. Contact Double Iron today for the experience-led consulting you need to navigate the challenges of managing a business while preserving family relationships.