Legal Blog

Balancing Interests in Family Firms

If surviving a family reunion with your relatives is difficult, imagine coupling that with juggling business concerns. For family-owned businesses, those family dynamics cross over into the boardroom. Careful planning and strategic governance structuring can help to ensure that the business interests continue to grow and develop.

When a family business has continued for a few generations, the ownership interests are more likely to be held by a larger number of family members. Finding ways to encourage participation amongst younger members, generate ongoing interest in the business, and educate owners in both the company’s health and corporate management can pose challenges for a business that had previously been closely held or managed by a few key family members.

Defining Family

One of the more sensitive issues which must be addressed in a family firm revolves around the definition of family. Control of company ownership is relatively easy when working with a family with two or three generations involved. After the introduction of a fourth-generation, the number of people involved can be unwieldy.

For some families, the adage blood runs thicker than water will shape their corporate framework, taking the position that only direct descendants of the founders are allowed ownership interests. There are pros and cons to excluding spouses or adopted children from involvement. However, studies have shown that bringing in extended family members can actually make a family-owned business more successful, especially when recognizing skills and talents amongst which can be applied to the growth of the business. The inclusion of adopted children – whether as stepchildren through marriage or through other adoption procedures – can also be challenging for some family businesses to address. A family business may be unwilling to provide stock ownership to a stepchild out of fear that the parental relationship will fail, leaving the stepchild with an ownership interest that would otherwise not have been granted. If a family business desires to include people who have joined the family as non-linear descendants, then they should seriously consider including strong buy-sell provisions in their corporate documents which would allow them to redeem shares easily in the event of divorce or other separation from the family.

Structuring

There are a number of ways that a family business can structure itself to encourage generational participation. Designing a board with rotating terms or term limits reduces the likelihood of stagnation at the decision-making epicenter of the company. Families may want to consider using their board members to represent branches of a family, allowing for adjustment when a branch is no longer active (either through extinction or voluntarily redeeming their ownership interests). Families should also build in provisions to address emergency scenarios where the head of the branch leaves behind minor children. Would the child’s guardian gain voting rights? Or, will a remaining branch member assume the role until the child reaches the age of majority? Alternatively, board seats could be held to a vote by all of the family, which could provide the opportunity for business-savvy members to run the firm; however, this structure could encourage lopsided representation from certain branches of the family. Regardless, good planning in the governing documents can greatly insulate the company from disruption when an unfortunate event befalls a member. There is no one-size-fits-all solution for family businesses, but with careful thought and consideration, the governing documents can provide guidelines for addressing these scenarios before they become crises.

Generational Concerns

Providing training to younger members can be incredibly beneficial for the continuing health of the business. This can be in the form of an educational setting, and in appointing younger members of the family to low-stakes committees (such as a philanthropic committee) where they receive on the ground corporate training without risking the company’s bottom line.

Constraints on time and proximity to board meeting locales may discourage participation from otherwise willing younger board members. Many family firms still utilize old bylaws designed before modern communications systems became commonplace. In-person meetings are great, but it can be difficult to commit to attendance at monthly (or even quarterly) meetings when younger members have their own immediate family’s calendars to juggle as well as possibly holding careers that are outside of the family business. Facilitating meetings with videoconferencing can encourage participation.

Without generational support, the corporation may need to find outside ownership or discuss divesting the business. Business succession outside of the family line can involve a significant amount of planning and adjustment – especially in transitioning job functions to non-family employees. A family business that is looking to transition in this manner should start planning in advance to make the transition as seamless as possible.

ABOUT KELCIE LONGAKER

Ms. Longaker’s primary areas of concentration include general corporate advising, administrative hearings, and state and federal appellate litigation.  She advises start-ups and small businesses during all stages of the business’s life-cycle.  She regularly drafts organizational documents, reviews commercial leases, negotiates franchising agreements, and assists with the sale of corporate entities.  Ms. Longaker represents many businesses that require liquor licenses, including restaurants, package goods stores, agricultural producers, and manufacturers.  She represents clients before county agencies in their applications for new licenses, transfers of existing licenses, or defense of challenged licenses.  She also handles land use and zoning matters, real property transactions, and homeowners’ association matters.

 

 

 

 

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