Barriers to family-business success and potential solutions
Early planning for operation of a family business can prevent later problems.
Many people depend for their livelihoods on family businesses. After all, at least one-half of U.S. companies are family-business enterprises, reports Family Firm Institute, Inc., citing the Harvard Business School. From the inception of a family business, organizers can take certain steps to improve the chance of commercial success and lessen the potentially negative impact of family dynamics or unexpected family developments.
The importance of open and honest communication among family members cannot be overemphasized going into a family business.
Formal business practices
It can be easy in a family business to interact at work in the same way everyone does at home or in the behavioral patterns of extended family relationships. While close, personal family relationships can bring significant strengths to the business setting, family interaction can also bring a level of informality or dysfunction to the office because of pre-existing, unhealthy relationship habits not necessarily conducive to business success.
To increase productivity, growth and innovation, observing business formalities within a family business is a good idea. For example, steps that could be taken to institutionalize professionalism and smooth business operations include:
- Formal job descriptions, including division of responsibilities and decision-making authority
- Careful choice of business entity (such as corporation, limited liability company or LLC, partnership or others), including a comprehensive operating agreement
- Family-member investment commitments as well as salaries and distributions
Carefully structuring the company up front can help to prevent family feuding later, even potentially staving off litigation if the business relationships should break down.
When a family business is launched, everyone may be all-in and steaming full speed ahead. While it may be uncomfortable, careful consideration must be given to how major ownership and management changes will be carried out in the future, including how the business would be wound down under certain conditions. For example:
- If a family member who owns part of the business divorces, what will happen to that person’s interest? The judge in the divorce may order that financial interest be divided or granted to the ex-spouse. Consider early what that would do to the control and management of the business and how it should be handled. One option may be to negotiate a buyout agreement that would trigger a preset payout to the spouse upon divorce.
- On the flip side, what if a family member in the business later marries, creating a potential interest in the new spouse?
- What if family member with a key ownership or management role becomes unexpectedly disabled, wants to retire or passes away? An succession plan should be set up well before these events setting out how management and control will be transferred and to whom, whether the person will receive a lump sum or periodic payments if disabled or retired, and, in case of death or disability, how a surviving spouse and other dependents will be supported.
- If the business is generational, what if some of the children in a generation are not business savvy or have no interest in the business other than receiving money? Such issues should be looked at early on and agreement reached.
Drafting the necessary business operational documents, agreements and contracts should be the job of an experienced business attorney, who should be involved as early as possible in the creation of a family business.
With offices in Fort Collins and Windsor, Colorado, the attorneys at Wick & Trautwein, LLC, advise individuals and businesses in all phases of the business lifecycle, including formation, commercial contracts, succession planning, dispute resolution and litigation throughout northern Colorado and southern Wyoming.