Ask SmallBiz: Family Constitutions

December, 2008

By Ken Gilbert, Family Business Expert

Q. What is a Family Constitution? Do all family businesses need one?

A. A Family Constitution is an internal, binding agreement that all family members involved in the business in any capacity agree to respect. The current owners draft the document and then present it to the next generation(s) for agreement and signature.

The Family Constitution includes high-level guidelines, such as financial, investment and divestment, and emergency management authority of family members. Rules of succession, or passing the business to the next generation, and other expectations about the future of the business are clearly set forth.

A Family Constitution also describes the current owners’ thinking on issues such as family eligibility to enter the business (or not) and the required qualifications of a family employee or manager. The Constitution states which key executive roles may (or may not) be filled by outsiders.

It clarifies topics that in many smaller family businesses are unspoken expectations, such as job descriptions to be fulfilled, compensation overtime, performance criteria and accountability, code of conduct and communication rules.

All businesses with a potential successor generation (that is, business owners with children) that do not have another type of exit strategy (selling the business to a third party before retirement, for instance) should have a Family Constitution in writing before the succession takes place.

The benefits of having a Family Constitution? Assurance that the family members employed in
the business understand how they contribute to it. Peace of mind that all dis-aster scenarios have been thought through and a plan to address them is in place. Finally,  certainty that the family understands and agrees on current owner desires and the direction of the company.

 

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Author:

Ken Gilbert