Employment contracts for family members
Clearly outlining the terms and conditions of a family member’s employment in the business is an important aspect in discouraging the notion of entitlement. This also helps minimize conflict amongst siblings or cousins working in the business together. If all family members understand how compensation is determined, what their roles and responsibilities are, and where they sit in the organizational chart, it is much easier for them to work together. A probationary period should also be applied to family members, as it is important to ensure they are compatible with those they work with. The damage caused by firing a family member or keeping one who isn’t competent can be significant. Using a probation period (as with non-family employees) can help avoid these types of situations.
Service contracts for retired owners
It is common for a family member who has retired from ownership to want to continue working on a full- or part-time basis. If the terms and conditions of this arrangement aren’t clearly outlined and understood by all active family members, it can be difficult for the next generation to take the lead and manage the business. Roles and responsibilities need to be clear for the person retiring, as it can be difficult to scale back and stop being involved in day-to-day decisions. Having a contract that outlines timing, compensation, and duties can help facilitate this transition for everyone involved.
Dividend philosophy and policy
Without a clear dividend policy, the amount and timing of dividends can cause a lot of conflict, especially among siblings. This is typically not an issue while the founder is still alive, as he or she will dictate the dividend disbursement. This being said, having a formula or methodology predetermined to calculate the amount of dividends to be distributed can save family members from long and emotional disputes. This way, all shareholders can easily calculate the potential disbursement using the formula, which means they will have the same expectations.
Governance
Having terms of reference for each of the governance structures the business implements will help keep all family members clear on the goal, frequency, appropriate topics, and voting mechanisms relevant to each structure.
Family council should be held once a year with all family members, including spouses, in-laws, and children. The goal is to inform the broader family of how the business is doing and where it is headed, as well as to remind everyone of the opportunities available to them as outlined in the family business rules. The family council does not make decisions for the family business, but it can make recommendations for consideration by the business. This annual forum is also a great opportunity for larger families to connect or reconnect with one another.
Family business meetings are held during the succession process and as required thereafter amongst active family members. This forum is used to discuss family issues that affect the business, as well as business issues that impact the family, and to develop the guiding principles and family business rules before they are communicated with the broader family.
A board of directors (BOD) is the legal structure that governs all incorporated businesses. In most small to medium family businesses, a formal BOD is not implemented. Typically, the owner(s) will meet and make decisions as needed on an informal basis. A board of advisors (BOA) is another formal structure often used in small- to medium-sized businesses instead of a BOD. When you have outside board members on your BOD, they become accountable for your business and can be held liable in certain situations. Therefore, in order to avoid these issues, many family businesses opt for a BOA where they can get the outside advice without the issue of potential liability.
Another governing body to consider is a contingent board of advisors (CBOA). As the name implies, this board would only be used in certain predetermined situations (i.e. on a contingent basis). For example, it could be used to help the family determine who will lead the business upon the sudden death or incapacity of the current owner/leader. This strategy safeguards family harmony by preventing the decision from lying solely in the hands of family members who are not qualified or comfortable under the circumstances, thereby allowing independent and trusted individuals to make the determination. It is important to ensure all parties know who is on the CBOA, and that its members are aware and understand their roles and responsibilities.
