Wednesday, December 19, 2018

5 New Year’s Resolutions For Family Businesses


January is almost here and we have vowed to start going to the gym, stop eating ice cream and finally organizing our sock drawer.  Now is also a perfect time to set some realistic business resolutions for the upcoming year.  Most family businesses set sales or profitability goals but sometimes overlook the more mundane items that come back to bite them.  We propose five simple, specific and achievable goals for 2019 that will benefit any family business:

Plan Your Exit (Or Your Escape)

Many of our family business clients have never considered what will happen to the business if key family members were unable to continue being involved due to retirement, death or disability.  Even more of our family business clients have never considered what would happen to the business if family members begin feuding.  It should come as no surprising that some of the nastiest shareholder disputes we witness arise between family members.  

Failure to plan for these contingencies can have significant consequences. It can result in sizable and avoidable taxes when transferring ownership of a business to the next generation.  It can deprive a disabled family member or their heirs from being able to capture any value of a business they helped develop.  It can also destroy the value of a business when fighting ensues between family members who cannot stand to work together and have no fiscally viable exit. Proactively establishing a succession plan with an attorney can help mitigate these risks down the line. 

Keep An Eye On The Money

If you are a passive owner (i.e., not engaged in the operations) of a family business, you have a statutory right to look at the book and records of the company.  You should do that once in a while.  Books and records (or the lack of them) can provide a wealth of information about how the business is being run and whether you are getting the income that is owed to you.  It also helps to keep operating family members honest.

Clean Up That Corporate Binder

Our family business clients tend to take two approaches to corporate record keeping: 1) the overstuffed corporate binder where some, but not all, of the three hole punched paper holes have torn through such that five pages hinge out when you hold it up or 2) the “what are you talking about” corporate binder that never existed in the first place.

If you are a corporation, you need to make at least one entry into your corporate record book each year. Major business events should also trigger minute entries in your books, for example, the sale or purchase of significant assets.  If you are an LLC, the annual administrative record keeping requirements are more relaxed but major business events should be reflected in the corporate minutes.  

Fresh Faces, Fresh Ideas, Reduced Liability

Consider inviting non-family members to get involved in your family business’s board of directors or advisory board.  As a matter of good corporate governance, non-family members tend to bring less baggage and can offer a fresh perspective. The existence of “disinterested” board members (i.e., ones who have no personal interest in the particular matter before the board) allows a family business to proceed with less risk of shareholder litigation from family member owners disenchanted with a particular action of the board. 

Sharpen Your “Bread and Butter” Contracts

Almost every business uses and reuses “bread and butter” form agreements to buy things, sell things, license things, employ people or mitigate risk.  When was the last time a C-level person or the company’s general counsel reviewed them?  Have any of the form agreements been tested with litigation and, if so, are there any modifications that could have prevented the litigation in the first instance? Learn from the past and make adjustments to your agreements to prevent history from repeating itself.  

Following these five resolutions for 2019 should help reduce any guilt around eating ice cream on your couch while staring at your unused gym membership.