Written Agreements in Family Businesses

Many of you are in family businesses.  I suspect that most of you don’t have written agreements with your family members dealing with the essential parts of the business.

If you are in business with someone, you should have a shareholders’ agreement, a partnership agreement or a joint venture agreement.  If the business employs other family members, there should be written employment agreements for them.

Why should you do this with your family? 

First, there are two ways that you get out of the business:  you die or you leave.  If you leave, you are either retiring or moving on because you no longer want to be in the business (or the others want you out).  The odds of you dying or retiring from the business are far less than you leaving for other reasons.

Second, people will do things to their family that they would not dream of doing to friends or strangers. Blood relationships make emotions the driving force behind disputes.  Instead of being practical, the parties have to win. 

A recent example is the case of Morris and Chester Waxman.  Their fight over their family business resulted in a trial that lasted two years.  The appeal court said: 

“The love and mutual respect between Chester and Morris were gone, replaced by the powerful animosity that only a bitter lawsuit among family members can generate. The brothers and their sons have spent much of the last fifteen years and many, many millions of dollars trying to prove that each was cheated by the other. The accusations and recriminations run the full gamut from the dishonourable through the dishonest to the downright criminal. Whatever the eventual legal outcome, Isaac's dream that his two sons should "share and share alike" in the business he started has been shattered.”

I have had a case where a sibling was shut out of the company.  She and her husband both worked there and were fired.  They were immediately without any income, which is a situation that would cause bankruptcy for many.  Had there been written agreements, things would have been easier.

I am not saying you should be distrustful of family members.  However, the fact that you are family means that you know a lot more about each other, including each other’s vulnerabilities.  You need to recognise that the more you trust someone, the more you are vulnerable to betrayal.

Some people say that putting a written agreement in front of family members created too much stress and tension.

Put it this way: 

If you can’t work out the terms of a written agreement at the start of the venture (when everyone is full of optimism and excitement); you shouldn’t be starting the venture.

Even if a business partner dies or wants to retire, there can be difficulties.  You may not want the partner’s beneficiary as a business partner.  You may not agree on what the retiring partner is to get when she leaves.

Having written agreements with your partners (family or otherwise) makes good business sense.