How to Structure a Family Business

If your goal is to own a business you can pass on to the next generation, listen up!

The leadership, structures and processes in your family and business are the reasons why you will be able to pass your company on to future generations.

You may be wondering how families like the Fords, Waltons’ and Knights built their multi-billion dollar companies – Ford, Walmart & NIKE, which have transcended a couple of generations. These companies have had to deal with common issues such as succession, sibling issues, branch rivalries, in-law entry into the business, management, employment, etc. The success of these family businesses are largely dependent on the existing structures adopted for the family and the business.

As appealing as setting up a family business is, it can be tough to draw a line between professional and personal relationships and this can seriously impact on the family dynamics.

THE HOW

Get a formal business structure

Set up a legal entity to protect individuals from the business in case something goes wrong. An LTD (private/ public) is a great option because it offers liability protection for the individual owners. However, there are other entities which may better suit the specific objectives for setting up the family business.

Set up good governance systems for the family and business

Given that the business will be controlled by a family, it is important to create structures which will enable the family engage with the business as well as structures which would enable the business run effectively. Yes, it is a family business but it should also be attractive enough for accessing capital/ debt financing, hiring excellent human resources, amongst others.

On the family side, creation of the Family Council/ family assembly, Family office, Trusts and Advisory Board are some of the structures which would enhance family engagement with the business. For the business, the Companies and Allied Matters Act, 2020 and the Nigerian Code of Corporate Governance, 2018 provide the systems that companies should adopt for sustainability, transparency and accountability.

The fact that it is a family business does not mean that all the directors and management team must be family members. An effective family business governance should include non-family members as amongst the board, executive team and employees.

Don’t create two classes of employees

It is important to detail performance expectations of family members who are employed by the business. Such expectations must be just like everyone else with promotion based on results not DNA.  Any special treatment given to family members will de-motivate other employees and may create tension. Never put family members on the payroll if they cannot make a real contribution to the business.

Draw up legal documents upfront

Legal documents like the shareholders agreement, family constitution, board charter, remuneration policy, dividend policy, employment/ HR policies will force everyone to deal with all the sticky matters upfront – succession, dividend payout, ownership rights as the family expands, etc.

The legal documents will provide clarity on the roles, rights and responsibilities of all family members including laying down how business discussions and disputes which affect the business will be handled. Remember that although your family business may have started as a side hustle or casual conversation at a family vacation, it is important to take the legal formalities seriously as the health of the business and your closest relationships depend on it.

References

The Gulf: It’s a Family Affair: Wendy Guild and Andrea Schulman: https://hbswk.hbs.edu/item/the-gulf-its-a-family-affair
Organising the Family-Run Business: https://hbswk.hbs.edu/item/organizing-the-family-run-business
Keepin’ it in the Family: How to structure a Business With Your Closest Relatives: Nellie Akalp

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