Imagine that you are sitting at the Thanksgiving dinner table with your family—aunts, uncles, cousins, and distant relatives from out of town. Someone at the table cavalierly asks: “who did you vote for ?” World war III breaks out while the family members debate Hillary versus Trump.
Now imagine that these same people are shareholders and employees in your family business. If these people cannot agree among two candidates about whom to vote for, how they will be able to agree about the joint management of their financial affairs? The answer is – only with great difficulty. This is one reason why so many family businesses, and so many families, end up in costly litigation.
Here are some observations, from someone who has litigated many intra-family disputes, about what might have been done to avoid a nasty and expensive lawsuit.
I. Sign a Contract
It may seem elementary, but this fundamental concept is often ignored by people in business. Should you really sign a contract with your brother about the maintenance of a family business? After all, isn’t this the person that you grew up with, shared a room with, and is your best friend? Of course you should. The interesting thing about the negotiation of shareholders’ agreements among family members is how absolutely divergent the views are of different family members about how to run the business. These views often manifest themselves in the negotiation process. Imagine, however, that there was no negotiation process and, instead, the business simply began and the debate commenced without a written agreement. The likelihood is that chaos would ensue, profits would dissipate through disagreements and nothing of a material nature would be accomplished. Thus, this basic point — the execution of a contract — is a fundamental and necessary component to the establishment of a family business.
II. Establish a Hierarchy
Someone has to be the boss. Historically, it has been Dad. However, in “modern families” other people can be asked to assume the mantle of leadership. Generally, it is wise to choose the person with the most business experience, the best education, and the most obvious leadership skills. In any family, the appropriate candidate should be obvious. If the parties cannot agree on this, it is generally a bad sign. Leadership is essential to any business and a family business is no different.
III. Treat The Family Business Like A Real Business
The family business is a real business. The family business should not be run like a family. The conversation between the leaders in the family business should not mimic the conversation at the Thanksgiving dinner table. Rather, family businesses should conduct regular meetings, where notes are taken, minutes kept, and tasks assigned. You should be able to judge the potential success of your family business by determining how easy it is to apportion tasks among family members after the Thanksgiving dinner is concluded – who will wash the dishes, the pots, clean the tables, fold the linens and take out the garbage? If this process proceeds smoothly following the big dinner, there is a greater likelihood that the family business has a chance of success. If the parties cannot agree, following dinner, how to clean up, how will they be able to run a business?
IV. Utilize written job descriptions
The easiest place to witness a good old fashioned power struggle is in the family business. This is because the people who comprise it have a long history together. In every family there are those who win the power struggle and those who lose it. Those struggles could be over the color of a room, the radio station that is played in the car during the family vacation to what everyone eats for dinner. The family business is an opportunity for the perennial loser to flex his or her muscles and establish a new beachhead, a place where his or her opinion is heard and obeyed. The problem is that it is only sometimes that the person who is espousing an opinion actually has the expertise to do so. Maintaining written job descriptions will create necessary boundaries and will ensure that only those people with a particular expertise handle those areas
V. Maintain Performance Measurements
After Cousin Johnny joins the family business he needs to be able to accept criticism. Cousin Johnny’s performance must be measured. Cousin Johnny must be treated like any other employee. If Cousin Johnny is given preferential treatment, by Dad, because he is Cousin Johnny, there will be resentment by other family members and by other employees who might not be family members. Cousin Johnny’s performance should be reviewed at least once a year and honest feedback provided. Cousin Johnny should have a personnel file in which notes are kept. This will prevent problems with Cousin Johnny in the future if, for some reason, he is removed from the family business and decides to sue. Treating Cousin Johnny like an employee is a much better idea than treating Cousin Johnny like Cousin Johnny.
VI. Establish and Maintain Written Hiring Criteria
If a family business is successful, the likelihood is that it will expand into hiring people who are not members of the family. It is also possible that additional family members may want to join the business. After all, everyone wants to be successful and what better way to be successful than to join something that already is successful. Plus, if your family business prospers, you might find relatives coming out of the woodwork asking for jobs. This is why you need to maintain written hiring criteria. You might decide that it is important for your family business to hire only college graduates, or individuals with engineering degrees. This will assist you in rejecting candidates, whether family or not, who may not have the requisite criteria. If these hiring criteria are maintained in writing, it will make Thanksgiving dinner all that much easier when Cousin Bob, whose application been rejected from the company, appears at your doorstep, Thanksgiving morning, holding an apple pie.
VII. Establish an Advisory Board
The problem with working with a family member during the day and then having Thanksgiving dinner with that family member the following weekend is that issues regarding the family business are more likely to arise at inappropriate times— e.g., during holidays, on weekends, or during the evening. If “Dad” or “Mom” is in charge of the business, this is more likely to happen. One suggestion for taking Dad or Mom “out of the loop” would be to establish an advisory board of individuals who have been retained for the purpose of dealing with sticky issues, within the family business, which might place Dad or Mom in an awkward position. Let the “advisory board” take the heat for a difficult issue. In this manner, Mom or Dad can explain, before asking Cousin Johnny to “pass the turkey”, the decision that was made, which may negatively impact him, was out of our hands. The decision was made by the advisory board.
Enjoy your Thanksgiving Turkey with your family and do not discuss either business or politics.