ANY relationship between the family and the business must be governed by policies.
If you are like most family business owners, you probably have initiated very informal rules with little or no compliance. That said, the likelihood of a future family business conflict is high.
Examples of undocumented policies that you established are rules related to your next generation family members being assigned to manage their respective departments, their compensation and equity percentage that are likely to be equal and setting weekend lunch gatherings to discuss business opportunities.
It is also likely that you have prepared a will that only your lawyer is aware of or an insurance policy ready to be monetized when an emergency strikes the family and the business.
As to investments and liquidity, I am certain that you also have set aside a significant amount of cash in a number of bank accounts and some assets like real estate to distribute to family members, as well as future liquidity for the business to cushion the impact when you are no longer around.
If you have extended family members due to past indiscretions (having children outside of wedlock), you have most likely set aside properties or trust accounts for them too so they will not be financially burdened when you are unable to provide their monthly allowances as a result of a debilitating condition or worse, death.
Article 887 of the Civil Code enumerates the list of compulsory heirs, including illegitimate children.
Additionally, providing for their future support as mandated by law will also serve as a deterrent against future claims against your estate.
Finally, for a select group of senior employees (non-family employees, relatives and cousins), I am also confident that you have incorporated (last will) a financial package that is sort of a reward or incentive for their long years of service. The gesture is meant to reciprocate their commitment and dedication when they supported you during the startup years. And with the entry of the next generation members, documenting their rewards is important.
I just enumerated a significant part of what a typical family business owner has been doing or planning to do for the family and the business. But in a talk I had recently in Singapore, I ended up exchanging notes with a participant who appeared to be confused and worried.
“Prof, I am not sure if I am on the right track. Despite the initiatives I put in place like buying insurance, real estate, etc, I am still bothered with the thought that my business might not last when I am no longer around. Am I doing it right?”
To provide clarity of purpose, I raised a slew of tough questions to business owners. Some of those questions I have listed below:
- Are your past initiatives on policy making sufficient to ensure your legacy will continue?
- Will your current actions cultivate harmony and improve relationships among family members when you are no longer around? Can you sense trouble ahead?
- Do the next generation members have what it takes to bring this business to a higher level? Do they share the same values and mission?
- Do you honestly believe that some of your children will sell their shares when you are no longer around? Do you think money will be a primary source of conflict?
- Do you want in-laws to actively participate in decision making?
- Have you put in place conflict of interest policies in place?
To be continued.