Monday, 30 January 2012 11:49

The Family Run Business: Heaven not Hell

Gordon Ramsay may have a firm grip in Hell’s Kitchen but has not proved as capable running the family business. A fall-out last year between the famous Michelin-starred chef and his father-in-law business partner has already resulted in three family members looking for work, could cost the celebrity chef over $20m and, if the back pages were to be believed, has severely tested his marriage. The saga is a very public and stark reminder, albeit a British one, of the added difficulties family run businesses frequently encounter.

Success in business is hard enough these days without having to maintain the loving and sometimes combustible relationships running throughout the family run business. In addition, the evolutionary nature of the family unit requires planning and management for every life or death, marriage or divorce, illness, or shift in the priorities of a particular generation. This by no means represents an exhaustive list of the extra burdens a family run business must contend with but merely illustrates the minefield that is encountered when mixing family and business.

Minefield or no, a family run business can be a unifying, personally gratifying and profitable adventure. There are, however, some key legal considerations which, if put into practice, can protect both your business and your family for generations to come. If Chef Ramsay had paid heed to these considerations then perhaps his personal business and family affairs would not currently be the stuff of gossip columns and celebrity news outlets.

Key Considerations:

 

• Structure
• Ownership
• Succession Planning
• Management

 

Structure

To facilitate structured decision making and planning for major transitions, it is advisable to organize the family business as its own entity (a corporation or partnership). Shareholder agreements can be used by a corporation to supplement the articles of incorporation and company by-laws by regulating the ownership and rights of shareholders, provide for the management of the company and resolution of future disputes while also acknowledging ethical mandates considered important by the company.

A partnership agreement is critical for any family business run as a partnership. Without a partnership agreement the Partnership Act, R.S.O. 1990, c. P.5 dictates that death or insolvency in an Ontario registered partnership will automatically result in the dissolution of the business. Partnership agreements should define the nature of the partnership, expressly acknowledge capital contributions, structure the allocation of profits and losses, define the authority of partners and provide for succession issues and conflict resolution. To ensure that the governing documents of your family business are appropriately drafted, consider consulting a lawyer equipped with the right skills to help.

Ownership

Owners interested in ensuring the success of the family business for generations to come must appreciate that management and ownership are two entirely different beasts. They shouldn’t necessarily go hand in hand. Control could rest in the hands of a few while all share equally in the ownership of the family business. Then again, it may not be in the best interests of the family or the business that everyone gets an equal share. It may be fairer for the family members in charge to have greater ownership than those who aren’t. In such cases alternative financial arrangements can be made for those not involved in the business. Ownership should be clearly defined in the governing documents of the business as should how ownership is altered or diluted upon the occurrence of certain events such as marriage, divorce, births, deaths and fractious disagreements between family members. The potential for strife and tension are considerably reduced when ownership issues are appropriately dealt with at an early stage and on an ongoing basis.

Succession Planning

Family business owners must regard themselves as responsible custodians of the family business for future generations rather than as recipients of a hereditary entitlement owed to them personally. Succession planning should be a component part of every prudently run family businesses structural, ownership or management planning. Succession planning is essential if ownership and operational control of a family run business are to be successfully and seamlessly transferred onto the shoulders of a younger generation. Tax considerations are a big aspect of succession planning. The successful transition of the business from one generation to the next necessitates providing the retiring generation with sufficient liquidity, minimizing estate taxes and preserving sufficient capital within the company to facilitate sustainability and future growth.

Issues of ownership, control and taxes must be approached from a multiplicity of perspectives: younger generations who will enter the business, younger generations who will not enter the business, spouses of younger generations and unrelated employees. Succession planning can be complex and is often complicated by marital problems, jealousy and other concerns. As such it may be prudent to rely on outside professional help to better manage the mixed bag of organizational, financial, tax, family and psychological considerations involved in succession planning. Do you have a lawyer equipped and experienced enough to quarterback such a team?

Management

Employment policies are imperative. There should be policies concerning hiring, internal promotion, compensation, standards of conduct and discipline. Job descriptions are a great way of clearly articulating the prerequisites (family tie, experience, education) for each position within a business. The policies should expressly account for any differences in the treatment of different categories of employee (step-son vs. unrelated employee of 20 years). Once written the policies need to be effectively communicated to everyone in the business and not treated like one of the family’s dark secrets. In order for the business to survive company policy must be amenable to change and where changes do occur it is important that everyone is notified accordingly. Establishing these policies early on will minimize surprises and help foster a culture of support and cooperation within your family run business.

Written policies can be written into the wall paper but it is how management is conducted day-to-day that determines the working validity of any articulated policy. Current owners should meet regularly to discuss issues of ownership, succession and management. Written records should be kept, especially concerning the relationships between family members and the business, and employment policies should be continually updated.

A prime responsibility for all custodians of the family business is the preparation of the next generation. The pool for future VP’s of the family business is potentially very small, if you want to keep management within the family, so an emphasis has to be placed on training every single day (acknowledging that sometimes meaningful training is best garnered outside of the family run business bubble). Ownership and control being the different beasts that they are, as already mentioned, means that family ownership of a business can be maintained even though control might be handed over to non-family members more adept at managing the business.

Conclusion

The financial and personal damage that resulted from Gordon Ramsay’s fallout with his step father and business partner could have been mitigated by a more pre-emptive approach to the considerations touched upon above. In addition to what has been mentioned in this article, there are many other tools available to help with the ownership and management of a family run business such as: Family Business Continuity Plans, Family Charters, Board of Advisors, and the creation of a Family Council or Assembly. In addition to these specifically crafted tools, there are professionals experienced in helping families through the variety of unique and challenging difficulties which may jeopardize the current and future profitability of a family business. Harnessing the benefits of the resources available can help protect a family run business from potential catastrophe, as a result of an all too common family fall-out.

Getting together with a lawyer experienced in this unique and challenging area, like those at Willson Lewis LLP, is your best starting point. Together the most suitable plan, perhaps as simple as drafting a shareholders agreement, can be discussed and implemented. Willson Lewis LLP can help ensure that your stewardship of the family business is one that is positively remembered and benefits your family for generations to come.

Do you have questions?

If you have any questions about family businesses, please contact your Willson Lewis counsel who will be happy to assist you.

 

This article contains general information only, based on the laws of Ontario, and is not intended to provide a legal opinion or advice. Readers should consult a lawyer with respect to the application of the information contained above to their particular circumstances. Readers may also contact clewis@willsonlewis.com or cwillson@willsonlewis.com to discuss any specific issues.