When ones thinks of a constitution, the context is usually a document used to govern a country, most notably the United States Constitution. But formalizing the policies, practices and procedures of a family-owned enterprise can be an effective means for defining how a family interacts with the business, as well as with each other.
In the early stages of a family business, the principals instinctively know what’s right for the family and for the business. With growth and the addition of family members, however, what began as everyone sharing the same vision can devolve into conflict and even animosity over running the business, not to mention the distribution of proceeds.
The constitution or charter formalizes the exact relationship between the family and the business, setting out guidelines for managing the business and resolving issues. This document reflects family and business values, focusing on maintaining harmony and encouraging cooperation, and most importantly preventing the conflicts that often doom family-run companies. In addition, it should recognize the success of the family business and honor the legacy of parents, grandparents and other family members whose contributions have made the business successful.
What to Include
The form of a family business constitution is similar to agreements developed for professional partnerships of lawyers, accountants, and other professional groups. These agreements provide a clear, understandable and enforceable set of guidelines for the effective operation and continuance of the enterprise. Each family’s business constitution will obviously be different, but most will contain the following elements:
- Definition of ownership values
- Vision and mission of the company·
- Creation of management oversight structures
- Establishment of financial benchmarks
- Liquidity provisions
- Family involvement policies
Within these general guidelines are numerous specifics for lawyers and accountants to hash out. For example, under family involvement, the following must be addressed:
- Compensation: should it be equal?
- Employment: are family members always entitled to jobs?
- Family roles and responsibilities
- Conflict of interest policy: should outside activities be permitted?
- In-law policy: should in-laws be allowed to work in the company?
As the business continues through two, three and even more generations, such issues become magnified and need the objective standards embodied in a constitution.
Mr. Mercurio is a Principal and Chair of Offit Kurman’s Business and Real Estate Practice Group. He serves as outside general counsel to businesses and business owners on matters related to corporate and business law, commercial transactions and real estate. As a strategic partner to firm clients, Mr. Mercurio regularly counsels entrepreneurial individuals and assorted entities on all aspects of business and commerce including formation and structure, ownership, management and control, financing and capital, expansion and acquisition, sale and transfer and contraction and dissolution.
Offit Kurman’s website is www.offitkurman.com