3 Keys to Successful Family Practices: Document, Document, Document

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. 

Training

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. 

Ownership

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). 

Bottom Line

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.