Good Business Agreements Make for Good Family Business

Posting by Joel C. Susco, CPA

Over lunch one afternoon, two brothers discuss an idea for a new business venture.  From a pile of hastily written notes and doodles on paper napkins a company is born.  After years of hard work and dedication, this partnership of two siblings grows to become a successful business with perhaps hundreds of employees including the children, grandchildren and even in-laws of the original founders.

This story is not uncommon in the world of closely-held companies and family businesses.  Likewise it is not rare for the documents governing these businesses to amount to little more than the pile of napkins from which the founders hatched their original ideas.  Strong personal relationships and family ties often lead family business owners to discount the importance of formalized agreements and business documentation.  When a dispute arises, often in the wake of the death or illness of the company founder(s), the dangers of relying on relationships to overcome problems become apparent.  Without fundamental guidance, these disputes can become toxic – leading to disruption of the workplace, costly litigation and even damaged family relationships.

As an advisor to closely-held businesses, experience has taught me that the time to address these disputes is before they arise.  Well-drafted agreements provide a rational framework for resolving conflict and governing business operations.  In the event that a parting of the ways may be necessary, these agreements can ensure an amicable separation by an agreed-upon method in an environment of cooperation.

Along with a comprehensive operating agreement, the family business owner may want to consider a buy-sell agreement, employment contracts, compensation agreements, and formal job descriptions for all key employees.  These documents are only tools and are only as useful as the thought put into drafting them.  Typically the more detailed these documents are, the less chance for misunderstandings to arise.  Business owners along with management and key employees, where appropriate, should all participate in thoughtful deliberation of the elements of these agreements, working together with attorneys, accountants and other advisors.

Protecting the value of a business is an important goal.  Protecting the strength of the family should be an even more important goal.  Good agreements guiding a family business help to ensure the survival and health of both these assets.

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