Unique Challenges of Family BusinessesAdded by Hawley Troxell in Articles & Publications, Business Law on October 25, 2013
Growing up in a family business has a way of teaching a person life lessons that cannot be learned in any other way. My experience growing up on our family farm and participating in our family business taught me that family businesses are more than a means to make a living but rather are an integral part of who I am and how I approach every facet of value creation within a business. Then, as now, business was never just business. Business was life.
In family businesses the emotional and financial impact of daily decision making often thwarts any effort to separate one’s “job” from one’s “life.” This overlapping combination often can lead to both familial and business issues. By taking the time to establish proper business policies and practices, many of these challenges can be avoided (or corrected).
Management, Responsibility, and Accountability
By nature a family business is informal, as you are working with the same people you celebrate life events and often socialize with. Decisions relating to company management and strategy will often be interpreted on a much more personal level. Every business, no matter the form, should to be governed by a written agreement between the owners. This agreement should outline who bears responsibility for daily and extraordinary decision-making, the process by which decisions are made (e.g., written resolution from owners to manager or majority vote, etc.), and the binding effect of those decisions on all stakeholders. A formal management structure that encompasses standard policies (including clear delineations of responsibility and accountability) and practices is essential in the family business structure. An outside legal advisor should be utilized to help shape the company structure and policy in such a way so as to avoid these inherent challenges.
Due to impending retirement, illness, death, divorce, internal disputes, or various other reasons, a family business cannot escape the need for succession planning. Sooner or later every family business will confront questions as to what the future of the company should look like. Should the company be sold? Should a child or relative be given control? What types of agreements need to be made and between who? An experienced business attorney can help you through the often complex issues surrounding the negotiation of a buyout or sale, structuring the transaction, and drafting all the associated agreements to assure a smooth transition for all parties. A well-advised agreement will help the founding members or existing owners avoid many seller pitfalls such as undervaluing the company and failing to have adequate protections from purchaser (or successor) default. You built your company and worked tirelessly to make it successful – so protect it.
Employee Policies on Hiring and Promotion
In family businesses, boilerplate employee policies will not work. An employee handbook can create a framework by which the company policy is instituted, however, family businesses face additional employment challenges. One such challenge is the creation of a glass ceiling (either knowingly or unknowingly) preventing non-family employees from obtaining promotion. This perceived inequity affects talent acquisition and retention. Due to the corresponding lack of employee motivation to succeed in his or her individual role, employee efficiency and productivity and ultimately the bottom line is directly impacted. A well-devised strategy with associated company policy can minimize the “family effect” as it relates to hiring, retaining, and promoting employees.
I have mentioned only a few of the potential issues that often arise in family owned businesses. Proper planning and counseling can help you avoid, not only the legal issues but also the family issues that can arise due to instituting poor company policy and practices (or worse yet – no policy at all). If you are starting a family business or have an existing business and see these (or other) issues looming on the horizon, please do not hesitate to contact me here or a member of our Business Group.
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