Imagine that you are sitting at the holiday dinner table with your family — aunts, uncles, cousins and distant relatives from out of town. Someone at the table cavalierly brings up the November election. Next thing you know, World War III breaks out, as your family members debate the merits of the candidates and the future of the country over turkey and mashed potatoes.
Now, imagine that these same people are shareholders and employees in your family business. If these people cannot agree between the two politicians, how will they 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.
Sign a contract
It may seem elementary, but the fundamental concept of a contract 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 … 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 and make it profitable. These views often manifest themselves in the negotiation process.
Imagine, however, that there was no negotiation process, and instead, the business began 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 founding a family business.
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.
Treat it as a 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. It is a good idea to retain an outside lawyer to help administer the affairs of the business.
You should also 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 the parties cannot agree, following dinner, how to clean up, how will they be able to run a business?
Establish an advisory board
Working with a family member during the day and then having Thanksgiving dinner with that family member the following weekend presents some challenges. Issues regarding the family business are more likely to arise at inappropriate times — during holidays, on weekends or after work hours.
If Dad or Mom is in charge of the business, this is even more likely to occur. One suggestion for taking Dad or Mom “out of the loop” would be to establish an advisory board. These are individuals you’ve retained for the purpose of dealing with sticky business issues that place Dad or Mom in an awkward position.
Let the “advisory board” take the heat for a difficult issue. That way, you can explain that the controversial decision — which may negatively impact a family member — was made by the advisory board and out of your hands.
Roger Slade is a partner in the law firm of Boyd & Jenerette, P.A. and chairman of the firm’s Commercial Litigation Department. Reach him at firstname.lastname@example.org.