The Family Business Constitution and It's Importance

Recently, I attended a workshop at the S. Dale High Family Business Center on family charters. Now, I am sure most family business owners think of a constitution as overkill and only useful for large family businesses. I tend to disagree and believe the presentation went a long way to help deepen my belief in the importance of governance in a family business.

Mike McGrann, the director of the Center, did an excellent job of presenting several case studies of family businesses that did not have a governing document. In each of these cases, a conflict surfaced that had not been previously discussed or documented and now caused a major conflict in the family. In one situation, a family member started a new company and the family did not have a conflict of interest policy. What made this even more difficult was this family member was running the most successful division in the business.
In many cases a family intuitively knows what is right for the family and the business. As time passes, however, and growth occurs in the family (in-laws, cousins…) and the business, it becomes even more important to move from intuitive to intentional. That means discussing these before they become issues and then documenting them in a family constitution.
Mike presented what he felt were roles and responsibilities for ownership/shareholder groups. This list included the following:
1.                  Define ownership Values, Vision, Mission
·         Who are we?
·         Where are we going?
·         How do we get there?
2.                  Create/elect management oversight structures
·         Empowered Board of Directors
·          Advisory Council
·          Association of Peers
·          Consultants
3.                  Financial benchmarks and basic liquidity
·         Dividend Philosophy: 90% of profits reinvested
·         Growth Philosophy: Exceed industry standards
·         Profitability Philosophy: Net operating profit = 5% of sales
·         Leverage: Debt to Net Worth not to exceed 1.5:1
·         Sale: Must receive ownership approval to sell large assets.
·         Liquidity: Buy-sell agreement
4.                  Family involvement policy
·         Compensation philosophy: Equality or differentiated compensation?
·         Employment philosophy: Entitlement or opportunity?
·         Family roles and responsibilities: What is the role of a shareholder in our family?
·         Conflict of interest policy: Outside activities and ownership?
·         In-law policy: Will in-laws be allowed to work in our company?
We also heard from Scott Weaver, CEO and President of APR Supply about some lessons his company learned during their process of documenting the Family Agreement. His list included:
1.                  It always takes longer than you think. A 5-year plan will take more like 10.
2.                  A 3rd party professional is well worth their fees.
3.                  Give your next generation responsibility and authority…Then get out of the way.
4.                  You are always a family member so no matter what age, position, title, or responsibilities…You have a “higher standard.”
5.                  Differentiate family time with business time, and ask for permission when switching from one to the other.
6.                  Each generation is only a steward of the business. It is their job to turn over a successful business to the next generation.
7.                  Establish financial, ownership transfer, and estate plans.
8.                  Each generation is responsible for growing the pie.
A wonderful session with some very practical tools and ideas. I would be happy to further discuss the importance of having a family constitution and if you contact me, I would also be able to share a sample family constitution.

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by Scott Heintzelman - Scott is a CPA, CMA and CFE living in Pennsylvania. Scott is a partner serving on the executive team at McKonly & Asbury LLP, a regional accounting firm with multiple offices in the Mid-Atlantic. The firm has been an IPA ALL-STAR as well as winning Best Places to Work in Pennsylvania for numerous years.

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