Businesses are developed and grown through their relationships with people – people as owners, managers, customers, and vendors. These people relationships, though critical for success, also create substantial risk for the business because people are emotional and often unpredictable. Most businesses protect against this risk through contracts. Why do they work? Contracts allow a company to set the ground rules for a relationship. Shareholders Agreements govern the relationship among owners, Employment Agreements govern the relationship between employer and employee, and Services Agreements or Liability Waivers may address key issues between a company and its customers. A primary reason why they work: they provide for “termination” provisions allowing the parties to get out if the relationship doesn’t work.
Family businesses are a little different. “Termination” is a tough sell because, in a family relationship, “terminating” a contract may also mean irrevocably damaging a family relationship as well. For this reason, most family businesses (at least initially) don’t document or plan for the “what if” scenarios; and understandably so. These can be very difficult discussions. Yet once family members decide to go into business together, the dice have been thrown and the best way to protect those relationships is through planning for the “what ifs.” Having an agreed upon plan to address the “what ifs” make them less frightening now and greatly facilitate the process working through them when they do occur in the future.
Two key planning steps necessary for family businesses:
1. Plan for transition of ownership through a Shareholders’ Agreement (or Operating Agreement for an LLC) and a Buy/Sell Agreement. Ownership transfers may happen through a planned buyout at retirement, but also happen due to death, disability or other life changes that may be unexpected. The agreements along with life insurance or key person insurance help the owners and their family members understand how a transition, whether expected or unexpected, will affect them. The transition will be smoother and less disruptive to the business.
2. Plan for transition of management through a clear set of company Bylaws and Employment Agreements. These documents spell out how the company is governed strategically and operationally and any term associated with the position. Thinking through these questions will help the company make management decisions in a structured and organized way with a view toward the business’ needs.
Agreed upon goals, principals, and plans will help maintain focus in the business to drive smooth transitions and greater success.