Regular Family Meetings

The foundation for any successful family business is shared objectives and a comprehensive plan for achieving them.  Neither is possible without trust and cooperation among family members.

Regular family meetings can help to improve communication, strengthen common values, identity, and goals, resolve disputes, prepare the business for challenges or change, and plan for the future.

Here are some suggestions for planning and conducting a family meeting:

·                      Each family has its own ways of communicating and making decisions.  These customs should be reflected in the meeting style and structure.

·                      Ask participants what they feel should be discussed.  Suggestions should be gathered into an agenda and distributed prior to the meeting.

·                      Invite someone to chair the meeting - the chair should be effective in managing discussions according to the agenda.

·                      Consider inviting a facilitator if the topic is likely to cause tension.

·                      Invite professional advisors to address technical issues when needed.

·                      Keep minutes, noting especially any matters that were resolved or which you need to discuss further.  Circulate the minutes after the meeting.

The practice of regular family meetings may seem unnecessary and formal, but experience shows that it can bring great benefits over time.  It can be used to promote co-operation and unity within a family, it can help reduce stress and disagreements at crucial times, and it can contribute to the continuing focus and prosperity of the business.

Active Board of Directors

While family unity and shared objectives are important, owners will also need constructive advice on managing and growing their business.

In most private companies, a small group of individuals will fill several different roles.  The separate functions of shareholders, directors and officers become mixed, and distinctions fade.  The result is that the special function of directors can be overlooked, and the company can miss out on the unique contributions they can make.

Independent outside directors can serve a useful role by providing owner/operators with impartial and honest advice.  Because these directors do not have an agenda to advance or service to sell, they can speak candidly in a way that inside managers or outside professional advisors cannot.  They can also contribute to the future success of a company by providing a wider pool or knowledge, experience and ideas.

Active outside directors can:

·                      Help with the strategic growth of the business;

·                      Act as a confidential “sounding board” in delicate situations;

·                      Offer new perspectives and encourage creative thinking;

·                      Monitor the performance of officers and hold them accountable for decisions;

·                      Take an objective view of disputes; and

·                      Offer advice, guidance and experience to help owners to prepare for future challenges.

Some outside directors are concerned about exposing themselves to personal liability.  If potential liability is too intimidating for prospective directors, a president can create an advisory panel which would advise but not make decisions.  The members of the panel would not be exposed to personal liability.

Succession Plan

In addition to the co-operation of family members and outsider’s fresh perspective on their business challenges, ultimately, the long term success of a family business requires a succession plan for ownership and management.

This is the final test of greatness according to noted business writer, Peter Drucker. It is a test that many businesses fail.  Only 30% of family businesses are successfully transferred from the founder to the next generation of the family.  Succeeding the founder is especially difficult.  The chances of a successful transition - whether for ownership by the next generation or for eventual sale - are greatly improved if the business has a succession plan.

A good succession plan has several benefits:

·                      It will help ensure a smooth transition in a transfer of control.

·                      It can provide for an orderly sale to existing management or to an outside party if the family decides to sell the business, and it positions the family to sell the business at a time of its choosing, which will help maximize the sale price.

·                      It can mitigate the disruption of the business if its founders suddenly retire, die or are incapacitated.

·                      It can support the internal development of future management.

·                      It will also help an owner realize the value of his or her ownership interest without straining the business’s financial condition.

Given these benefits, it may at first seem puzzling that more family businesses do not have succession plans.  Owners, however, often have difficulty making decisions about what role their children should play in the future, and families are often dependent on the business to maintain their lifestyle.  Personal rivalries, discomfort in thinking about death and disability, and the natural unwillingness to give up control can also make it harder to see and act in the true long-term interests of the business.

The following principles can help overcome these challenges and will contribute to the development of a sound plan:

·                      Begin it now.  To develop a plan, families will need to consult with legal and financial advisors and with members of the family, including those who are not directly involved in the business.

·                      Communicate.  Transparency builds trust.  Owners should share key information with with family members who are working in the business and those who are not.  By communicating, they can foster realistic expectations and gain consensus.

·                      Be fair.  Family members who own shares but do not work for the company should receive a reasonable portion of its profits.  Perceived inequity, especially in the distribution of wealth, can lead to tension and undermine trust among family members.  However, being fair does not necessarily mean treating everyone the same.  Financial compensation should be related to an individual’s input in the business.  For succession planning, each child’s competency should be assessed to determine whether that child is suited to take over the business, or whether the business should be sold.

·                      WORK TOGETHER.  Try to develop a shared vision among the family of where the business is going.

·                      Be flexible.  Ensure the plan can accommodate changes in the family, deaths, unexpected events and opportunities.

·                      BE COMPREHENSIVE.  Address succession in leadership in the three spheres of ownership, management and family.

Current Shareholders Agreement

A key element of any succession plan is an agreement between all of the owners.  A written shareholder agreement can establish the owners’ common understanding of their rights, obligations and remedies and how their business will be managed.  Those issues should be addressed in a written shareholder agreement.

The easiest time for parties to enter a shareholder agreement is before ownership is passed to the family’s next generation.  It can be challenging to deal with issues like separation of the parties or dissolution of the business, but it is advisable to do so shares are transferred.  It will be more difficult to discuss such matters once ownership has been passed on, or if a relationship becomes strained.

A shareholder agreement should address:

·                      Financing the business, whether by issuing more shares or by loans from shareholders, banks or others;

·                      How profits will be distributed and reinvested;

·                      Internal management - which decisions will be made by shareholders, by directors, which will be delegated to management;

·                      How disputes will be resolved;

·                      Shareholders’ rights, if any, to choose directors;

·                      The number of directors, how they will be elected and their powers; and

·                      Decisions on how and when shares can be transferred or issued.

After an agreement is negotiated and signed, it should be reviewed every few years and when any important change is made, like the admission of new shareholders.  Unless the agreement is kept up to date, it will lose its effectiveness.

Annual shareholders’ meetings can be an excellent way for the Board to address owners’ concerns and to improve the shareholders’ understanding of management issues.

Experience shows that family businesses benefit greatly by having regular family meetings, an active board of independent directors, a sound succession plan, and an up-to-date shareholders agreement.  Developing or improving any one of these things can seem daunting, especially when owners and managers are focused on the day-to-day challenges of a growing business.  But those challenges will be met more effectively - and the long-term success of the business will be more secure - if action is taken now.

Other Resources:

John L. Ward

John Ward is an American author and professor.  He has written several books on family businesses which offer helpful insights and suggestions.

Professor John Davis

Professor John Davis of Harvard University developed with others the “Three Circle” model for understanding family businesses.

The three circles represent related perspectives of ownership, management and family.  Some family members will have only one of these perspectives, while others will have more (and sometimes conflicting) points of view.  Each of these areas needs to be managed differently.

By: Michael R. Henry, of Houser, Henry & Syron LLP

Toronto, Canada.

Michael can be reached at 416-860-8021 or mhenry@houserhenry.com.