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October 2022 < Back

Important documents for Family Owned Enterprises

Essential documents that help families define, structure and sustain success across generations.

Shareholder Agreement / Buy-Sell Agreement

Shareholder agreements provide clarity about the framework and rules of ownership. These are legal documents that define the various aspects of being an owner of a family business, like ownership valuation, ownership transfer or sale options, voting rights and selection of board members. They form the legal basis for how shareholders manage their ownership interests. Shareholder groups that are aligned on their purpose will find it relatively easy to create these agreements with the proper investment of time and energy. Early-stage businesses with only one owner rarely need a shareholder agreement. Most shareholder agreements are created when ownership is passed to the subsequent generation (commonly at the sibling stage) and before the shareholder group becomes too large to concur upon the terms of the agreement.

Corporate Bylaws

Corporate bylaws are the procedures, rules and standards that govern how the corporation is run. Bylaws are the central reference point for managers in their organization and may also delineate rules for how the board votes. These documents are particularly helpful in creating increased structure to meet the needs of a growing and increasingly complex business. Bylaws can quickly become outdated and lose their pertinence. Qualified business attorneys help in creating these documents in a proactive manner and to ensure a timely review schedule as these need to be kept updated.

Estate Planning and Trust Documents

Estate planning documents delineate how assets are transferred from one generation to the next. These documents often create trusts that can affect the wealth for generations to come and can be a significant way of creating structure for how the family has influence and control over assets. Estate planning documents are created by attorneys along with the grantor(s). The documents are often designed to minimize taxation when the wealth is transferred, with varying levels of effect on the subsequent owners of the business. Proper estate planning creates clarity and certainty for the family. In the case of a trust, the appointment of trustees, along with their relationship with beneficiaries, has important implications for future ownership, since technically the trust will own the shares, not family members directly. A lack of estate planning can threaten the survival of the family enterprise because taxation at the highest, most unfavorable rates can force an unwanted partial or full sale of the company. Additionally, some trust structures can unintentionally create so much distance between beneficiaries and ownership that a feeling of disconnection from their enterprise can emerge. Therefore, the trust structures need to be carefully designed.

Vision / Purpose / Values Statement

"Why are we in business together?" – This an important question that business families must ask and subsequently answer. Families who define and create a strong sense of purpose commonly find strength and alignment in this type of document. This statement can be brief and succinct or quite detailed, depending on the needs of the family and the business. Some families separate out various aspects of vision, purpose and specific goals into separate documents, while others have a more generalized type of statement. In any case, these statements can provide a meaningful way for the enterprising family to have a common orientation and reference point. A clear statement acts a guide and align the actions of owners, managers and board members on behalf of the business and the family. In addition to a statement of business values, many families create a statement that outlines the family’s most salient values and principles. Documents of this type define, influence and sustain the culture of the family. Values statements can serve as enduring markers of what the family stands for and are also an important reference point for future generations as they subsequently review and refresh the family values. Family meetings can be designed to bring these statements to life by reading them aloud and referring to them regularly to guide decision making.

Code of Conduct / Communication Ground Rules

Families who have defined guidelines for behavior and interaction are better able to manage the charged emotional aspect of being family members in business together. A code of conduct provides the “guardrails” for behavior, communication and interaction that can help provide a more objective view for everyone. Communication ground rules can delineate what respectful and effective looks like for the family, particularly during a family meeting. The documents provide a neutral, mutually agreed-up-on set of ground rule for everyone, regardless of position. These guidelines can also extend to the public actions and visibility of family members. Social media policies are increasingly being developed to ensure that individual family members’ use of social media does not adversely affect others. Family meetings can be guided and kept on track by ensuring buy-in and adherence with these agreements.

Governance Charters

Any working group needs a charter to define its purpose, goals, roles and responsibilities. This is true for legal entities such as fiduciary boards, for family governance groups such as family councils, and for task forces and committees. Governance charters define the basic structures of these groups and provide the necessary guidelines for them to achieve their goals. It involves outlining the roles, responsibilities, boundaries and communication channels among governance forums. Having these aspects defined can support effective and optimal function and information flow throughout the system. Governance charters provide a great degree of flexibility as the family grows or the environment changes, allowing changes and updates to meet the most current governance needs for the family and business.

Family Employment and Compensation Policy

A family employment policy outlines the credentials, expectations and selection criteria for family members who desire to work in the business. Delineating how family members will be selected for employment can create a more fair and open process that can help manage destructive nepotism and encourage meritocracy. These policies can also provide compensation terms to ensure family members are fairly and consistently compensated. Family employment policies are best created proactively, before multiple family members work in the business. The absence of these types of policies can mean confusion for family and management about the expectations for hiring family members. Even when these policies are created, there can be challenges in adhering to them when the desires of the family conflict with an objective policy. A family employment policy is usually created by the family, ideally with input from non-family managers and family business consultants. Business families can readily learn from what has worked for other families, and then adapt the details to it their unique situation.

Written Succession Plans (long-term and emergency)

As many family businesses desire continuity from one generation to the next, having a written, long-term succession plan can strongly support that goal. This type of plan can bring clarity and stability for both family members and non-family management because they know there is a plan in place, even if they are not privy to all the details. If a crisis occurs, having a written plan can alleviate a lot of pressure on people who are faced with running a business amid a highly emotional event. This document should be written by business leadership, with input from the senior management team as appropriate. Many governance charters require the CEO and management team to create both a long-term and an emergency succession plan. This type of forethought also allows time to identify gaps in personnel capabilities and to address them strategically.

The Family Constitution

The family constitution is a complete set of agreements and documents that help govern the family in their ownership endeavors. All the documents listed in this article (with the exception of personal estate plans) form segments of the constitution, along with other documentation like family and business historical information. Constitutions should be updated over time. The family constitution acts as the family guardian — the keeper of the most essential elements that organize and guide the business family.

For many of the family-oriented documents listed above, having a fair and inclusive process to develop the documents is as important as the final outcome. Gathering input from all stakeholders while also moving the creation process forward may seem challenging, but it is worth investing in this effort. This is a process that never truly ends, but the hallmark of a successful enterprising family is an ongoing investment in continual development and improvement.

# Name of the Document Purpose
1 Shareholder Agreement / Buy-Sell Agreement To manage the ownership interests and decision-making
2 Corporate Bylaws Ensures Corporate Governance
3 Estate Planning and Trust Documents Tax efficient manner to transfer wealth to next generation
4 Vision / Purpose / Values Statement Alignment of purpose; values as the guiding principles; continuity of family's culture across generations
5 Code of Conduct / Communication Ground Rules A set of defined guidelines for behavior and interaction among the family members as well as outside the family
6 Governance Charters To enable fair decision-making processes, information sharing and nurturing the relationships based on different roles of family, business and ownership.
7 Family Employment and Compensation Policy To promote a fair and open process for selection and compensation of family talent engaged in the business.
8 Written Succession Plans (long-term and emergency) Continuity plan for key roles in business, ownership and family across generations
9 The Family Constitution A master agreement of shared commitment by the family to govern the business. Agreement on the rules and principles on vital matters of decision-making.

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PFBI Connect is conceptualised, designed, edited and published by PFBI. All the articles and news are researched, selected and suitably edited at the discretion of the editorial team. All rights reserved. Information and data featured in PFBI Connect cannot be printed or reproduced without prior approval.

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