Newland's Business Notes

Family Businesses

Volume 4 Issue 2 -- March/April 2000

The paper upon which many family business agreements are written is extremely thin. In fact, it is so thin, that when a dispute arises, these agreements, often oral — Poof — disappear! While that may be a jocular perspective on family business disputes, in reality, they are nothing to laugh about.

At first thought, it probably seems unnecessary for family members to have partnership or organizational documents. Many business owners might wonder, “Why would a close family need counseling or professional assistance from outsiders for their family business?”

Experience shows that the reasons are as many and varied as there are families. One common problem is that family disagreements are often emotionally charged and involve contentions that would not exist between unrelated parties.

In July, 1998, this newsletter (Don’t Assume Your Children Will Get Along) discussed the fact that owners of a family business may begin to disagree after the demise of the unifying older generation. Now, I am addressing the fact that family relationships can also deteriorate while the family member-owners are all living.

Repeatedly, I have seen family relationships change. You may have heard of a couple divorcing after 20 or 30 years of marriage. Why? Often the key factor is time. People change over time. What seemed clear, practical, and sensible 10 or 20 years ago, when a business (or marriage) started, may be perceived quite differently today.

What are the benefits of a family agreement addressing issues such as business continuity and who will control the business? While a written agreement will not insure success, it does make sense to memorialize in writing business understandings between family members.

The exercise of preparing the agreement, using checklists and considering likely contingencies, such as death, incapacity, and divorce, forces family members to confront situations they may not otherwise address until such an unsettling event occurs.

Doesn’t it make sense to address these contingencies before they occur, when everyone involved is thinking clearly and not suffering the stress of a traumatic event?

For example, after a family member dies, bereavement often makes it difficult to deal with important business issues; or, feuding spouses or ex-spouses may have a disrupting influence on a business.

In stressful times, it is not uncommon for family members to form cliques competing for influence, control, or money. Or, as children and grandchildren mature, they may adopt views that are disagreeable to other family members.

Obviously, much depends on the older generation. Many parents who started and control family businesses have difficulty envisioning any problems. In such situations, the possibility of considering contingencies such as buy-outs, covenants not to compete, etc., cannot be adequately addressed.

To some, formalizing such relationships might appear to be a method used by attorneys to generate legal fees. Not true. It is not unusual for attorneys to become involved because there was nothing in writing in the first place and a family disagreement over a business matter ended up in court!

While it can be difficult to formalize and document family business decisions and plot directions for the future, having had many clients embattled in family disagreements, I am firmly convinced of the need to plan ahead and document agreements, even among members of the closest family businesses.

Copyright 2000

Published by the law firm of Newland & Associates, PLC
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