Family business agreement

Set the tone and structure of your company with a family business agreement. These
documents, as varied as the people and companies they are designed to protect, often
include some of the following elements:

 Role definition. Not all family members are equally suited for all positions. Placing
loved ones in the proper jobs can have a huge impact on the company’s performance and
longevity. Linkilawsuggests a family business agreement define what roles family members
will play and what tasks they are responsible for. Also listed should be any steps family
members are to be precluded from taking — hiring, for example, or loaning or borrowing
funds.

 Family code of conduct. You’re family. You’re all on the same page. You have the same
motivation and the same goals. You share a set of family values. That’s all great news. Now
put it down on paper. Memorialize your goals and the conduct expected of anyone whose
actions could impact the reputation of your business.

 Creation of both a family council and an advisory board. Both of these are
recommended by the Conway Center for Family Business. The family council’s purpose is to
provide updates to, and receive input from, all family members with a financial interest in the
company, whether or not they are currently employed by it. In contrast, the advisory board
should be comprised of non-family members, with the purpose of providing objective,
outside advice. Issues for the advisory board range from assessment of family members’ skill
sets to succession planning

Buy-sell agreement
Whether it is included in a partnership agreement, part of an LLC operating agreement
or a stand-alone document, any business with more than one owner needs a buy-sell
agreement. Also known as a shareholder agreement, this legal document controls the
transfer of shareholder equity and it may prove essential for keeping the family
business just that. Not only will such an agreement spell out what happens in the event
of a death or retirement, it can also provide guidance for family members who simply
want out.

According to William Weigand of Davis Wright Tremaine, LLP, a good buy-sell

agreement will be customized for your business and regularly updated. It should
include an appraisal of the current value of the business — one specifically suited to
your type of firm — and a plan to periodically reassess that value.
Perhaps most importantly, a buy-sell agreement should include a complete list of
trigger events—those which result in the transfer of ownership of company shares.
The list should include, but not be limited to, death, retirement, divorce or the desire
of a shareholder to separate from the family business.

Corporate governance checklist

Successful family enterprises have developed rules, communicated those rules to both
family and non-family employees and established procedures for dealing with non-
compliance. But those family rules are not the only ones your business needs to
follow. Don’t let a lack of family turmoil blind you to regulations and expectations of
the wider business world. Run your family business the way any successful, similarly
sized business is operated.

A good checklist should be prepared with the help of legal counsel and include items
like holding board and shareholder meetings and keeping proper minutes. Armed with
an up-to-date corporate governance check list, you can assure yourself as well as your
vendors, customers and employees that your business is being run legally and
ethically.

[Read: A Guide to Creating a Board of Directors]

Working with family—people you love and trust—can provide a welcome sanctuary
in complicated times. Putting some basic agreements in place can help preserve that
sanctuary for future generations.

CO— aims to bring you inspiration from leading respected experts. However, before
making any business decision, you should consult a professional who can advise you
based on your individual situation.
olicies should not be a compromise of personal opinions but should emerge from values, beliefs and
principles that the family believe should apply in operating their business. The core policies revolve
around: • Decision making/governance • Compensation/performance evaluation • Employment • Codes
of conduct Decision making/governance • How are family decisions made? By consensus? By vote? •
Where voting, who is eligible to vote? • How is stalemate resolved? • What rights do family members
have to be on the board of directors and will they be paid? • What balance is there to be between
family/ non-family members? • Who should chair the board and how are they selected? • Are there
criteria for family members serving on the board? • Can family members not on the board contact
independent/professional directors on their own? Compensation/performance evaluation This is one of
the biggest areas of contention, often interacting with liquidity policies and distribution policies at
shareholder level. Pay problems can arise due to role confusion, paying too little or too much, use of pay
to smooth ups and downs, using pay to achieve tax savings and using pay to maintain parental control.
Key issues family should explore are: • Market compensation or some alternative? • Privacy or
transparency on compensation of family members? • Will compensation decisions be validated by
outside consultants, independent board members, benchmarking? • Expense accounts and perks? •
How is performance to be assessed relative to compensation? • Who will determine those standards of
performance? • Who will perform the performance review and what rewards are there for exceptional
performance? • What penalties are there when performance does not meet expectations? • How will
these decisions affect non-family employees? Will they feel they are treated fairly? • Will our policy be
known to non-family employees? Will it motivate or de-motivate them? • Do our compensation
decisions make good business sense in driving a profitable successful business? Employment • When will
family members be permitted to work in the business? Qualifications/educational requirements/outside
work experience? • Will all be allowed join or only when positions are available and they are
appropriately qualified? • What process is there for hiring people, including family? • Who makes the
decisions? What criteria will be used? Will family members be favoured over non-family? • Will in-laws
be permitted to work in the business?

• Will only family who have the potential to rise to the top be permitted to join or can people join at
lower levels, as long as they understand that is their role? • What are the rules in respect of promotion?
• How is a family member’s non-performance dealt with? What about full time versus part time
employment? What about summer employment or part time jobs for younger family members? Codes
of conduct • What rules will we establish as regards respect in dealing with each other? • How will we
handle conflict? • Will we solve our problems behind closed doors and not in front of employees? • How
do we support each other? What information should we share with each other? • What sort of
communications policy should we have? • What about confidentiality? How do we handle media
relations? • Should family members be allowed date employees? What about our lifestyles? • What
about contracts with other businesses owned by family members? • What about personal use of
business assets? Documentation/agreements When decided upon, many of these issues will need to be
documented. Some may form the basis for an overall guiding statement of how the business should
operate or a detailed document of protocol to be followed. On a more comprehensive basis, they may
be documented as part of a family constitution and at a shareholder level, by way of a shareholder
agreement. Many of the issues mentioned fall into the categories of business statement or business
protocol or family constitution. At shareholder level, shareholder agreements would generally be
concerned with the following: • Who can own shares? Must the family members meet certain
requirements to be owners? • Should stock have different voting rights? • Can in-laws or non-family
employees own shares? • In what circumstances can the company reacquire stock? • How will buyouts
be funded? • When can stock be sold? • Will the other owners/the company have the right of first
refusal? • How will the company be valued for any transactions in shares? •What should the distribution
policy be? The possibilities for developing family business policies are potentially endless. Focus on
those that are key to your business and family to facilitate clear communication on expectations and
assist in resolving future potential sources of conflict.

Every business is different.  Certainly, every family is

different.  But family businesses, as a group, share certain
challenges and opportunities. In order to ensure their businesses
survive, thrive and grow, leaders of family businesses should pause
for a minute and either prepare or update each of the following:

1.   A Shareholders Agreement (also known as a “buy-sell”

agreement).

This is a document that controls the ability of shareholders to

transfer their equity in the family business.  For so many families,
keeping the equity within the family is paramount.  The legal basis
for restricting transfer outside of the family and managing transfers
within the family is the shareholders agreement.  This can be a very
simple document of six or seven pages or a complex agreement of
sixty or seventy pages.  It is entirely dependent on how the family
wants to handle it.

2.   A Written Succession Plan.

Given that succession is frequently cited as the biggest issue facing

family businesses, it is surprising how many family businesses
procrastinate when it comes to preparing a succession plan.  One of
the biggest reasons is that they have not yet made a final decision as
to who should lead the business in the next generation.  The thinking
is that it would be a waste of time to sit down and plan out a
transition without knowing to whom the business is transitioning.

But a succession plan does much more than just name successors. 
And a family business owner would do well to start thinking about
some of these other issues, even if one or more successors have not
been chosen.  Will the transition include ownership or leadership or
both?  What will be the time frame of such transitions and how
should they relate?  What will be the role of the older generation
during and after the transition?  These are just some of the legal,
financial and practical aspects of a transition of a family business that
the owners should be thinking about – even if they have not yet
determined a successor.    Most family business owners are surprised
to realize how much there is to consider in this process.  Preparing a
written document is instrumental in organizing these thoughts,
confirming consensus among the current owners, and establishing a
roadmap for any chosen or prospective successor.

3.   A (Family) Employment Policy.

One of the great opportunities and challenges of a family business is

employing family members.

But it is very important to clearly delineate between the family

member relationship and the employee relationship.  Expectations
must be appropriately set by everyone involved.  This is important
for the health of the business, the health of the family relationship,
and to ensure all employees – family and non-family – feel that
everyone is being treated fairly.  For example, to ensure that family
member employees are qualified for the job, some successful family
businesses require that the rising generation complete college or
work elsewhere in the industry for a period of time before joining the
family business.  Some institute rigorous reviews of family member
employees to ensure there is no special treatment.  Others expressly
provide for special opportunities for family member employees
because they may be expected to take leadership roles later in their
career and need to be prepared for that.  However a family business
wants to structure those relationships, it is important that the policies
be set and written down for all to see.

4.   An Estate Plan.

An estate plan is really for the individual owners, not for the
business.  Therefore, it is something the lawyers for the individual
family member should prepare – not necessarily the lawyers for the
business.  Nevertheless, it is usually hard to separate the plan for the
future of the business from the estate plans of the individual owners. 
While the estate plan does not necessarily need to be something
shared with all the family members, it is important that the individual
owners have thought through their own estate planning.  It is also
important that all the estate plans of the owners together allow for
an appropriate transition of the business to the next generation.

5.   A Checklist for Corporate Governance.

A family business with strong leadership can exist and even thrive for
decades without adhering to the best practices for corporate
governance.  It is all too easy to dispense with regularly called
directors’ meetings, annual shareholders’ meetings, the keeping of
meaningful minutes or consents, current stock records and written
authorizations of key corporate agreements.  Yet when the business
faces a major transaction or any kind of a legal challenge, it is always
better to have a clear record of all of these things.

A family business should pause to consider the state of its corporate

records and the corporate governance practices it either is or is not
observing.  One of the reasons a checklist prepared by an attorney is
such a valuable tool is that family business owners – just like the rest
of us – do not know what they do not know.  Having a healthy
corporate governance checklist and policy can provide for better
communication, better adherence to corporate norms, and
protection against claims that management behaved improperly
What is Share Holder Agreement ?
Going into business with someone close to you can be a smart idea and a great
adventure. You may be considering launching an enterprise with a family member,
friend or a close colleague and the benefits are countless. You can share the set up
costs, contribute knowledge and experience, fuel each other’s ambition, bounce ideas
around and support each other.

Being on the same page from day one means a collaboration should work really well,
and of course you will undoubtedly enjoy celebrating in the inevitable success of your
joint venture! One of the biggest advantage is that you and your trusted business
partner would try hard to succeed so as not to let each other down.

What could possibly go wrong?

At the beginning it may seem inconceivable that the relationship may break down or one
of you would want to quit the business. Yet even in the most trusted business
relationship, circumstances and priorities can quickly change. To just think it might
never happen to you is merely burying your head in the sand. It is therefore imperative
that the collaboration is supported by the correct official legal documentation. This
formalises your business agreements and ensures that all parties are suitably protected.

What Legal Documentation do I

Need as a Co-founder?
In order to protect everyone who is involved in the collaboration it is crucial to put a
Shareholders’ Agreement in place from the outset. This contract enables the founders
of a company to regulate their rights as shareholders of the company. What is a
Shareholders Agreement?

A Shareholders’ Agreement, also known as a Founders’ Agreement is a formal contract

between the company founders. The details of the contract, which are agreed upon by
all the shareholders, outline everybody’s intentions and obligations as well as their
rights, responsibilities and liabilities. It includes details on share transfer, management
structure, exit strategies, dividend distribution and policies and procedures.
Why is a Shareholders Agreement
so Important?
Putting a Shareholders’ Agreement in place creates a vital legal foundation for your
business or start-up and minimises risk. It ensures all investors are on the same page
from the very beginning of the enterprise and is also an important way to manage
potential future disputes that may arise.

When you are starting out it may be hard to imagine what kinds of disputes could
materialise in the course of launching and growing your business. Differences of
opinions are however inevitable and can unfortunately lead to severe and damaging
clashes. Having your Shareholders’ Agreement already in place is much more beneficial
than trying to negotiate terms when parties are aggravated.

What needs to be included in a

Shareholders Agreement?
In a Shareholders’ Agreement, the founders are protected by agreeing on a set of rules
for the future transfer of shares and the level of consent required for making major
decisions. The agreement stipulates what happens if a shareholder decides to leave or
if there is a falling out. If one founder leaves, the sale of his shares could be subjected
to other founders’ consent. Alternatively, the remaining founders could also have the
chance to buy his shares before someone outside the company does.

A Shareholders’ Agreement is specifically tailored to the needs of your business.

Information required includes shareholders’ names and various stakes, who is on the
board of directors, roles of the directors and how profits are to be distributed. It also
details what happens in adverse situations when a director passes away, resigns or files
for personal bankruptcy.

The document also sets out the level of consent required (majority or unanimous) for
key business decisions such as adopting a business plan or approving a transaction
above a certain value. Also how fundamental company decisions are to be made such
as changes to share capital and winding up the business. It can also include a non-
competition clause and identify any confidentiality obligations.
The agreement is a private document and as such does not have to be made public.
This means that a Shareholders’ Agreement does not need to comply with any set form
or procedure, but must be completed in a manner that is enforceable at law.

So Should You Take the Plunge?

In a word, yes! As long as you have the correct legal documentation in place then there
is no reason why not to go into business with a friend or family member. Get your
Shareholders’ Agreement prepared from the outset and make it a priority to do so. Then
no matter who you are in business with, you will have the added confidence that your
risk is minimised giving you the freedom, security and peace of mind to concentrate on
growing your new business venture. Good luck!

You can easily create a Shareholders’ Agreement with Zegal along with all your
essential business and legal documentation

What is a family business agreement?

It is a non-legally binding document that provides a clear framework for how your family
directs matters when it comes to the family wealth and the family business. It is a
bespoke document that caters to the needs, beliefs and characteristics of each
individual family.

Writing a family business agreement allows your family to talk openly and honestly
about their hopes, expectations and worries for the future which can provide clarity,
improve communication and avoid the business being affected by issues such as death,
divorce and incapacity.

Having worked with small and medium sized family businesses with high growth,
especially those going through significant changes we are able to identify the common
issues that can destabilise that business. A family business agreement can define:

 roles, relationships and structure within the family business

 protocols for resolving disputes and decision making

 remuneration, employment and changes in the family such as marriage or

divorce
  succession plans for the business and family wealth.

The family business agreement is a bespoke document individual to the needs of your
own family and business and can avoid the issues that arise from life events that could
damage and endanger the future prosperity of the business

Do Family Businesses Need an Operating Agreement?

The need for an operations agreement in business arrangements is crucial to ensure

transactions are able to continue even when disagreements and conflict arise. A
family business is run with loved ones, and this may cloud judgment, so an
operations agreement should be included in the necessary documentation to avoid
future problems.

Family businesses are run by and with those that generally love each other. When emotions
are involved in business arrangements, it is possible these situations may become volatile.
Even though spouses, parents and children and similar circumstances may bolster
relationships, disagreements are inevitable. Because of this, it is important to have
paperwork that has been created to ensure the business survives these ordeals and
transactions may continue despite any conflict 

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between loved ones. This means that an operations agreement is imperative for the
company. If the family business resides in a state where a deadlocked argument causes a
dissolution of the organization, the operations agreement file becomes the saving grace.

If the company is a larger business such as a corporation, an operations agreement is

usually necessary. There are many others to consider such as shareholders, directors,
employees and management. The operations agreement explains certain details for
arguments, responsibilities for partners or owners, shares and the percentage of interest in
the company and various other important details. Without an operations agreement’s terms,
the death of a majority shareholder, co-owner or partner could result in difficulties. There
are usually specifics about dividing interest, stock or shares and how these are sold in a
reasonable manner. If no conditions exist for these situations, someone that could topple
the business may buy the shares or stock.

Why an Operations Agreement is Important

Operations agreement documents are vital pieces of paper within a company that has more
than one person that owns or manages it. For partners, co-owners and majority
shareholders, this assists with ending arguments, continuing business transactions when
these persons are unable to and helping to sell shares or interest in the company after a
partner or owner dies or leaves. When these persons are family members, emotions often
cloud judgment and arguments could become the end of the entity. With the operations
agreement, there may be an outlined and structured process. This may bypass any
complications in product manufacture or service distribution.

One vital piece of business in an operations agreement is the process of disseminating

stock, shares or interest when a partner or owner dies or cannot continue within the
company. The fair market value of the stock or interest is often provided to the person
leaving. If he or she dies, the others are provided an opportunity of purchasing these at a
reasonable price so that the remaining interest is distributed. However, other processes
may exist such as a buyout, passing the shares to another person, including a spouse in the
arrangement and an heir inheriting the interest. When these persons are family, the stock or
shares may be passed on without the need to purchase them.

Family Complications in Business

The primary reason an operations agreement is necessary for most companies is due to
arguments and conflict that arise from certain decisions. Even companies run and managed
by family members is subject to verbal fights and sparring between each other. If these
persons are partners or co-owners, this could lead to a deadlock that may result in the
dissolution of the company in the states where this occurs. However, even without this
threat, deadlocks could cause business transactions to halt and revenue to stop. This is
devastating to the company and any employees that work for the family. The eventual
ruination of the business or family relationships may arise through these arguments.

The operations agreement may have contingencies in place to handle a deadlock. This
would provide a means to end any arguments or ensure that business transactions still
continue until a decision has been made about the product, service or continued processes.
Some decisions may affect marketing, advertising, manufacturing or distribution. When
detailed in the operations agreement, conflict could be avoided and relationships saved with
family members. A proactive solution within the document often leads to better resolution for
the decision deadlock.

Family Business Lawyer Assistance

To ensure an operations agreement is valid and the clauses are enforceable, a business
lawyer should be hired for assistance. The terms may need to be edited or added to an
existing document within the company to provide for future conflict and potential deadlocked
decisions.