When it comes to employing relatives, having rules in place–such as a family constitution-can help the family business run professionally. But how many family businesses have these kinds of agreements in place before they are needed? Even a simple set of guidelines for handling requests for loans from relatives can help to keep the peace at those moments when business intersects with family. Affluent family businesses often represent a large portion of an advisor’s clientele. These clients bring a broad range of complex planning needs that require a balance between business best practices and an appreciation of family dynamics. As one owner said, “It’s a family business and the business is the family.”
However, many advisors know that owners often postpone discussing advanced planning issues, such as succession planning and buy-sell agreements, in order to tend to the day-to-day running of their businesses. Even the most forward-looking business owner can be diverted by everyday things: a problem with deliveries, production snafus, closing deals and so forth.
Separating the business from the personal
One thing that distinguishes successful entrepreneurs is the almost total entanglement of personal finances with business finances. While this kind of behavior is also seen in the committed executive, it has more implications for the business owner–and his or her advisor. When a nephew asks for a loan to start a business that sounds like a good idea, should the money come from the business or personal accounts? How should a daughter working in the business be compensated versus a son not in the business?
For families with sufficient assets, one possible solution is a family office, which helps to separate true family issues from business issues. Even without a full family office, a family constitution or protocol can delineate between the two by outlining roles and responsibilities, requirements for employment in the business, family values, and long-range strategies. It can also address how non-family members can help guide family decisions. The constitution, which should be reviewed every year, evolves as do circumstances and the family situation. Like the U.S. Constitution it should be written inclusive enough so alterations are more tactical than strategic. You don’t want to have a family debate every year or so analyzing the purpose and value of the constitution–just discussions about fine tuning following established written procedures.
Many families–or at least the matriarch or patriarch–often follow some unwritten version of a constitution or rules. Every family and family business is different, but a constitution or protocol would include some version of these topics:
1. Personal and family visions and goals
2. Philanthropic goals
3. Voting and financial participation amongst family members (present, future, divorced, etc.)
4. Role of the family “administrator”
5. Roles and responsibilities for:
? Family members discussing and deciding family issues
? Family members involved in the family business
? Family members not involved in the family business
? Who keeps all family members (especially those not working in the business) informed about news and developments, including those related to benefits and income?
1. Procedures for individuals to present financial requests or questions to the family
2. Steps for decision making
3. Modes of communication that are appropriate for the family (e-mail, texting, in-person meetings, personal calls, conference calls, annual family retreat meetings, etc.)
1. Details about requirements to be employed by the business (see more details below)
2. Compensation for informal administrator, if any
3. Dividend/distribution of income, if any:
? Same for everyone or adjusted up for working in the family business?
? Adjusted based on role/years in the family business?
? Extra portion for family member doing community service, such as teaching, full-time volunteer work, etc.?
1. Family board to oversee the family office or informal administrator