Business Law

Susan Park: How to keep family members together in a family business

Assistant professor of business law at Boise State’s College of Business and EconomicsFebruary 19, 2014 

In law school years ago, my business associations professor gave us advice I have never forgotten. “Never go into business with family,” he warned. “It makes for a very bad Thanksgiving dinner.”

In the years since, I have seen the wisdom of his advice on several occasions, both in my personal life and as a practicing attorney. However, his admonition is not always true. Some family businesses — and their personal relationships — thrive.

Family businesses are often capable of pulling together in ways that unrelated owners cannot. Especially during economic downturns, family businesses may benefit from the strengths of their personal relationships.

But maintaining solid family relationships while operating a business is not always easy. What makes a family business successful? What legal steps might family businesses take to ensure continued success?

Owners of a family business usually have a long, complex history (sometimes referred to as “baggage”) that they bring into their everyday business decision-making. Sometimes even the distant past colors family business decisions in unanticipated ways. Effective communication — stating needs and expectations and listening to others — can be critical. If good communication is too difficult to manage alone, counselors trained in family dynamics can help families create good habits and diffuse challenging situations.

Legally, family businesses can also take certain steps to ensure continued success, especially in times of transition. Prenuptial contracts are often a good option for family business owners who have plans to marry. A prenuptial agreement can safeguard the continued prosperity of the business by establishing that only one spouse owns that particular asset, which removes it from the marital estate.

A shareholder or partnership agreement between family owners is also a good idea. First, it might address whether and how much family owners will be compensated. Many family business experts suggest that the financial benefit of being an owner should be treated separately from the financial benefit employees receive for working for a business, at least if only some members of the family work as employees. This structure can help to avoid feelings of unfairness that might arise if one member does the lion’s share of the work but all members, even those who do no work at all, receive the same financial rewards.

The agreement should also address succession. A buy-out provision ensures that ownership of the business will stay within the family by requiring an exiting partner to sell his or her interest to those who remain rather than to an outsider. It should also contain a fair method of valuing the departing owner’s interest in the company. (Insurance policies are typically purchased to supply the buy-out proceeds in the event that one owner dies.)

Finally, if the company grows large enough, franchising individual stores might be a smart way to help individual family members by giving them a chance to “go it alone” in an already proven business and strengthen the family legacy in the process.

Each of these business arrangements is complex and must be put in writing. Consulting with a competent attorney is important.

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