Preparing a constitution for the family business

A distressing number of family businesses collapse amid heartache and recriminations. Yet failure is not inevitable! With careful preparation, family members can lay a solid foundation for success.

Preparing a constitution for the family business

Virtually every farm begins as a family business, but how many farms in your district are run by the second generation? And how many third-generation farms are still successfully under the control of the founding family?

Very few make it this far!

The same phenonmenon can be seen the world over, as family business consultant Tony Balshaw points out in Thrive – Making Family Businesses Work (Human & Rousseau).

Mum and Dad start the business, the second generation siblings build it up, and the third generation loses it! But if it can get through the ‘cousins consortium’ stage, it has a good chance of becoming a household name.

Setting the rules of the game
One reason so many family businesses fold, and incompatible members so seldom part politely, is a confusion of the key business roles of buying and selling. Yet the solution is simple: one family member must buy while the other must sell. This division of labour happens routinely in the corporate world, where rules for these and many other procedures are established.

Families that operate similarly reduce the risk of a family feud and losing control of the business. According to Balshaw, the basis of this should be the ‘family constitution’. This document should cover the following topics:

  • Founders’ vision: All family members should know what the intentions of the founders were. It helps to build and get buy-in to a common vision.
  • Family vision, mission and values: Formulating these gets agreement and commitment from everyone, and provides the foundation of the business.
  • Family council: Establishing and operating this formal committee is a crucial step towards building family unity and harmony. The council usually comprises all family members above the age of 16 and meets at least once a year. Its primary purpose is to act as an advisory body to the trustees and the board of directors, and its decisions are binding on all family members. Any member may request an agenda item and decisions are taken by consensus. If a deadlock is reached, each member present should have one vote, and the chairperson should have the casting vote. Any serious conflict that arises should be resolved through a third-party adjudicator.
  • Employment conditions of family members
    These should be set by the board of directors and made clear to all. They should be in line with the market and with employees of the business at the same level.
  • Investments: Suggestions for investments can be raised by members for consideration by the board of directors.
  • Loans to family members: Clear rules should be laid out on how these will be dealt with.
  • Trustee appointment and succession: In the case of family trusts, it should be established how successor trustees will be appointed.
  • Family member’s involvement in outside businesses: How this is handled is up to the family, but needs to be nailed down. The constitution could state, for example, that “no employees, whether family or not, may involve themselves in active business outside the family business”.
  • Employment of family members: Again, there are no hard and fast rules. The document could, for example, state: “No family member is entitled to a job in the business. If there is a suitable opening, and the family member is suitably qualified for the position, he or she would receive preference.”
  • Appointment of directors: This should be the prerogative of the shareholders, with the family council being free to make suggestions.

A major benefit of drawing up a family constitution with the input of all concerned is the process of debate between family members. But it’s well nigh impossible to develop a constitution fully supported by all. Get professional help from someone experienced in the field.

It’s worth it!