Five Legal Documents Every Family Business Should Have (and Use)

Every business is different.  Certainly, every family is different.  But family businesses, as a group, share certain challenges and opportunities. In order to ensure their businesses survive, thrive and grow, leaders of family businesses should pause for a minute and either prepare or update each of the following:

1.   A Shareholders Agreement (also known as a “buy-sell” agreement).

This is a document that controls the ability of shareholders to transfer their equity in the family business.  For so many families, keeping the equity within the family is paramount.  The legal basis for restricting transfer outside of the family and managing transfers within the family is the shareholders agreement.  This can be a very simple document of six or seven pages or a complex agreement of sixty or seventy pages.  It is entirely dependent on how the family wants to handle it.

2.   A Written Succession Plan.

Given that succession is frequently cited as the biggest issue facing family businesses, it is surprising how many family businesses procrastinate when it comes to preparing a succession plan.  One of the biggest reasons is that they have not yet made a final decision as to who should lead the business in the next generation.  The thinking is that it would be a waste of time to sit down and plan out a transition without knowing to whom the business is transitioning.

But a succession plan does much more than just name successors.  And a family business owner would do well to start thinking about some of these other issues, even if one or more successors have not been chosen.  Will the transition include ownership or leadership or both?  What will be the time frame of such transitions and how should they relate?  What will be the role of the older generation during and after the transition?  These are just some of the legal, financial and practical aspects of a transition of a family business that the owners should be thinking about – even if they have not yet determined a successor.    Most family business owners are surprised to realize how much there is to consider in this process.  Preparing a written document is instrumental in organizing these thoughts, confirming consensus among the current owners, and establishing a roadmap for any chosen or prospective successor.

3.   A (Family) Employment Policy.

One of the great opportunities and challenges of a family business is employing family members.

But it is very important to clearly delineate between the family member relationship and the employee relationship.  Expectations must be appropriately set by everyone involved.  This is important for the health of the business, the health of the family relationship, and to ensure all employees – family and non-family – feel that everyone is being treated fairly.  For example, to ensure that family member employees are qualified for the job, some successful family businesses require that the rising generation complete college or work elsewhere in the industry for a period of time before joining the family business.  Some institute rigorous reviews of family member employees to ensure there is no special treatment.  Others expressly provide for special opportunities for family member employees because they may be expected to take leadership roles later in their career and need to be prepared for that.  However a family business wants to structure those relationships, it is important that the policies be set and written down for all to see.

4.   An Estate Plan.

An estate plan is really for the individual owners, not for the business.  Therefore, it is something the lawyers for the individual family member should prepare – not necessarily the lawyers for the business.  Nevertheless, it is usually hard to separate the plan for the future of the business from the estate plans of the individual owners.  While the estate plan does not necessarily need to be something shared with all the family members, it is important that the individual owners have thought through their own estate planning.  It is also important that all the estate plans of the owners together allow for an appropriate transition of the business to the next generation.

5.   A Checklist for Corporate Governance.

A family business with strong leadership can exist and even thrive for decades without adhering to the best practices for corporate governance.  It is all too easy to dispense with regularly called directors’ meetings, annual shareholders’ meetings, the keeping of meaningful minutes or consents, current stock records and written authorizations of key corporate agreements.  Yet when the business faces a major transaction or any kind of a legal challenge, it is always better to have a clear record of all of these things.

A family business should pause to consider the state of its corporate records and the corporate governance practices it either is or is not observing.  One of the reasons a checklist prepared by an attorney is such a valuable tool is that family business owners – just like the rest of us – do not know what they do not know.  Having a healthy corporate governance checklist and policy can provide for better communication, better adherence to corporate norms, and protection against claims that management behaved improperly.

Drew Steen is a business transactions attorney at Davis Wright Tremaine, LLP.  He represents both buy-side and sell-side clients in mergers and acquisitions, venture capital investments, joint ventures, equity co-investments and restructurings.  He also serves as regular corporate counsel for several closely-held and family-owned companies.  Drew can be reached via email at andrewsteen@dwt.com or directly at 206.757.8081.

*This was also published in Family Business United.