In pursuit of a more perfect succession

Transitioning a family business from one generation to the next can be and often is a perilous process. And most family businesses attempt to do it with zero guidelines. 

The problem exacerbates when you’re trying to transition a business from the second to the third generation, or third to fourth. Many family businesses were founded and had success based on the principles and culture that the founder created. But each generation is different, with different ideas of what the culture and principles of the business should look like. Of course, in a changing world, change is always necessary. 

But principles matter, too — especially for a business built on them. In fact, one of the biggest roadblocks I encounter as a family business consultant is the hesitancy of a founder to relinquish control because of fear that the principles and culture that built the business will be lost. The best way to avoid this hesitancy — while ensuring that principles and culture of the business will not be lost — is a family constitution. 

What is a family constitution?

Family constitutions are formal documents that define a family's values, strategic goals and governance structures when it comes to the business. Delving into these aspects — many of which are not specifically business-related — is essential because, in the realm of family businesses, planning for the family is just as important as planning for the business. This document dictates the family's values and principles, articulates its objectives and outlines the mechanisms for crucial decision-making. 

Below is a list of example issues that a family constitution can address, developed by Omar Vasquez from Davis Wright Tremaine. 

1. When is the right time to tell heirs about the business?
2. What are guidelines for hiring and firing family members?
3. Who will lead the family business?
4. What is the criteria for selecting leadership positions for the business?
5. What are the rights and responsibilities between family members who are active in the business and family members who are inactive in the business?
6. Who serves on the board of directors and how are they selected?
7. What is the compensation policy for family members active and inactive in the business?
8. What happens to ownership shares when the share-owner marries, divorces or dies?
9. Should ownership shares be given to nonfamily executives?
10. What are the long-term goals of the business?
11. When, if at all, should the business be sold?
12. How is the performance of the family business being measured?
13. How do the values of the family influence the running of the business?
14. How are family members active in the business held accountable for their actions?
15. How is the family business constitution amended?

Must-do

I now require a family constitution when working with a family on a business succession. In the past I viewed a family constitution as a “nice to have.” But after decades of doing this, I now know it’s a must-have. 

In fact, for the retiring generation, NOT creating a family constitution is selfish — the act assumes that the kids will just figure out when you die. In most cases, the refusal to create a family constitution is borne from fear — fear of letting go, fear of losing what you have built, the fear of asking the hard questions and a fear of making the hard decisions to provide guidelines for the next generation. But in reality, a family constitution is an opportunity to memorialize what makes your family and family business unique — your priorities and values. Of course, each generation will evolve and the values with them, but the core of the initial vision can live on with the right document, created in the right fashion. 

So, what is the right way top do it? It differs from family to family, but I have developed the following guidelines to help families come to an agreement on the constitution:

• Set your vision. Remember, you're not just drafting a document; you're creating a roadmap to prevent conflicts down the road. Base the vision on your beliefs about how both the business and family should function. Keep it broad, not tied to specific individuals.
• Define nonnegotiables. Decide on the essentials: what’s nonnegotiable. Also, figure out when the next generation should/can bring in some flexibility to their approach to business and family matters
• Allow autonomy. Recognize that as the next generation grows, gets married and starts their own families, they'll need some independence. Plan for it in your constitution
• Involve the whole family. Creating a family constitution is a journey. The first draft should be put together by the founder/current leadership. After the current generation creates a draft, decide when to bring in the next generation. Their input is crucial for "buy-in" and a successful outcome. 
• Make it a fluid process. Creating a family constitution is not a one-and-done deal. The process will and should evolve over time. Engage in continuous discussions with members of the family, be open to different points of view and don't rush it. Give yourselves the time needed
• Consider hiring professional help. Some topics can be tricky. Bringing in a family business consultant who can help mediate sensitive issues, especially those with differing perspectives, like prenuptial agreements, can help. 

Remember, creating a family constitution is a dynamic process that reflects the evolving nature of your family and business. Take your time, involve everyone and adapt as needed. In the end, your family, and your business, will be far better off today and into the future.