Keeping a business in the family is not for the faint-hearted. But while only a third of family-owned businesses succeed under a second generation of ownership, with the survival rate dropping to about 10 per cent when the third generation takes over, it remains true that 40 per cent of Fortune 500 businesses are family-owned.

With the passage of time and as the family business grows - and with it the families within that business - it becomes imperative to formalise and structure the agreements that are reached between relatives participating in that business. This is achieved through a family business constitution or family charter, a written agreement entered into by relatives participating in a family run business.

The 'constitution' aims to establish a code of conduct and operating procedures to regulate certain aspects of the business and to define the role that each member of the family will play in the development of the business and its progression from one generation to the next.

For a family constitution to be successful it must be custom-developed and must evolve as the business and the families within it grow and develop.

It mainly seeks to:

• ensure a harmonious collaboration within and between the family business;

• clearly establish a fair process of the distribution of the profits generated by the business among the various family members;

• strengthen the relationships between the family members;

• guarantee the independence and prosperity of the family business;

Most business family constitutions are made up of three main sections: The first part recounts the family history and the business' evolution. It clearly sets out the family values by which they stand. The second section defines the rules of governance of the family unit within the ambit of the family business. It clearly establishes the different categories of players within the family business. It also attempts to address the expectations and ambitions of the different players.

In the third section, it strives to establish the framework of the various committees (such as family council or business council) to ensure a free flow of communication and, secondly, to establish the way in which conflicts are managed within the family business and setting up procedures to reduce tension.

A family charter, on the other hand, is a decision-making tool that sets out the values which are important to the family and the rules for resolving problems peacefully.

It is not intended to be a legal document (like a shareholders' agreement) but a reference point that clearly sets out criteria for the goals, management philosophy, share ownership, working relationships, family relationships, and succession of the family business.

The key to avoiding serious conflict is to involve relatives in the process of creating a family business charter. Set aside the time to discuss the components and obtain consensus. Refer to the charter often to clarify direction and resolve conflict. Re-assess the charter every couple of years and make adjustments to reflect any important internal and external changes.

A family council creates a structure for business and family issues to be discussed in regular meetings. The structure will vary with the family relationships, the size of the family and the size of the family business.

Creating the structure is important because it allows a place for people to talk. The family council sets out the important principles that come from the parents. This is their family leadership role. The rules around how the family council works, and the actual holding of the meetings, are ways to engage direct family members as well as spouses and children.

An outside advisory board is a non-regulatory body that can include other entrepreneurs, professional advisors, trusted friends and other non-family members. The board mentors and directs the business in areas like planning and decision-making. Research has shown that board members bring additional perspectives to the table and can greatly improve the quality of the decisions made.

Depending on the size of the organisation, a family participation policy is an important tool. It sets out the criteria around whether family members and/or their spouses are welcome in the business and what they need to do to participate in it. It also relieves some anxiety that family members will not be disowned from the family if they don't participate in the business.

The author is managing partner of 2M Management Consultancy Ltd which specialises in family business consulting and training through a partnership with Family Business Solutions Ltd, and holds directorships in several companies.

mariod@2mmanagementconsultancy.com

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