In my last blog, Lessons from Tommy Boy: When Your Continuity & Succession Plan Involves Family, I outlined tips for successfully bringing a family member into your financial practice, from advisors who have been there, done that. In each case, the advisor had a well thought-out and documented plan for taking that route – a good idea if you want your business to last past the next generation. According to the Kennesaw State University Coles College of Business, about 80% of the world’s businesses are family owned. More than 30% make it to a second generation – but only 13% survive to the third generation.
Here are some key documents or agreements you should put together before committing to bring a family member into your business, to help ensure its survival for generations to come.
Family Business Philosophy and Code of Conduct
What does it mean to be a family member employed by your business? Family members coming into the business need to understand your philosophy and values, which can be documented in a Family Code of Conduct. For example, if times get rough, will the business reduce nonfamily staff before family? Will family employees be expected to take pay cuts? Starting with how the business will operate in the worst of times will make it easier to document how family members will behave in the best of times.
Family Employee Policy
While “bringing family into the business” may make you think of your own children and grandchildren, what happens when your sister or brother asks you to make a place for their spouse? Or their children? A Family Employee Policy clearly outlines the requirements and expectations for family members who join the business, which may include a certain number of years working for another company in the same industry. The policy also may set forth that no additional jobs will be created without a thorough workforce analysis that supports the need for the new position.
You shouldn’t hire anyone without a job description, and that goes double for bringing on family members. Job descriptions should include a title that describes responsibilities; a position overview that explains what this job sets out to do; specific job requirements, including education, experience, licenses, skills and abilities required for the job; tasks and duties; physical job requirements such as standing, lifting, walking, etc.; and a disclaimer statement.
It can be tempting to pay family members less than a competitive rate, based on the assumption they will recoup those wages with shares or full ownership down the road. It can also be tempting to pay family members above competitive rates, because – well – you care about them and want them to have a comfortable life. Either approach leaves someone – your family member or another nonfamily employee – unhappy. Pay family members a fair, market-competitive wage for their work, and set a policy about “borrowing” against future wages.
Don’t overlook any bonus plans, which allow you to share the profits from a good year. Bonus plans should be based on performance – the company’s and the individual’s – and apply equally to all employees; this is usually done based on a percentage of the employee’s salary or wages. Family and nonfamily members should receive a clear, written description of the bonus plan, along with formal performance reviews at least annually.
Don’t assume that family members will learn the business by genetic osmosis. After-school jobs and summer internships can get them started before college. Apprenticeships and mentorships can help after they’ve been hired. Consider including mentors from outside the company, perhaps members of your advisor board, client advisory council or centers of influence like attorneys and accountants. Practice management consultants can also help evaluate your family member employees and suggest areas of improvement. Don’t overlook the possibility that these programs should be open to nonfamily employees. In addition to your regular employee orientation, have a separate orientation for family member employees that covers the family business philosophy and code of conduct.
A survey of websites specializing in family business matters showed consensus on this point: stock should only be given or earned by family members who work for the business. Granting stock to family members outside the business carries inherent conflict: those in the business will want to re-invest profits into the business, while those outside the business will want cash. These conflicts will only increase when you retire or die.
Plans to transition ownership, whether before or after your death, should be based on family members in the business purchasing the business or stock shares. This agreement should be separate from your estate. In addition, tax benefits from the transfer of your business typically work only when there is actual cash going from the buyer (your family member) to the seller (you).
The key concept to communicate to every family member entering business is that they have a greater obligation to the business than nonfamily employees. The Family Code of Conduct is higher standard than the regular code of conduct. They will train harder, work longer hours and face higher expectations that nonfamily employees. Documenting all aspects of the family member’s relationship to the business from the beginning will lead to a smoother succession in the end.