Harford Business Ledger: June 2006

This month's Harford Business Ledger features family businesses. I had an interesting exchange with the HBL's editors regarding the content of my column. My column for the family business issue of 2005 discussed buy-sell agreements, management agreements and the absolute paramount necessity of having all of these issues in writing. Understandably, the editors suggested that my article this year focus on other topics involving the family business. A reasonable request! I then thought back over the past year and contemplated the number of family business issues which I and other members of my firm handled. Without exception, every single one of these matters would either not have occurred or would have been much more simplified had there been written documents detailing the parties' understandings. Based on that exercise, I asked the editors for permission to be somewhat repetitive -- these issues bear repeating!

Any time more than one person is involved in a business enterprise there should be careful and comprehensive documentation of all aspects of the relationship. It is important that this documentation occur at the very outset of the enterprise. This is true for a number of reasons. First, if you cannot come to an agreement before entering the enterprise, perhaps you should not enter the enterprise at all. Second, once the enterprise commences, the participants will exert all of their energies towards the success of the business and will not want to enter into negotiations of agreements which do not produce income and are frequently seen as "non-productive." Third, individual agendas begin to develop and terms such as "calculation of the purchase price upon death" and similar issues begin to be negotiated with those agendas in mind.

All of this is true of every business venture, but the opportunity for disaster increases exponentially when you are dealing with family businesses. If the venture goes south, not only does the business suffer, but family relationships can be destroyed forever. As I stated in my article last year: "It is bad enough to have a falling out with a partner you will never see again, but when the falling out affects the invitation list at Thanksgiving Dinner, it strikes much closer to home and heart."

At the outset of the enterprise you should assemble a team of professionals to assist in the proper establishment of the enterprise, including an attorney and a good business accountant. The type of entity should be discussed with due regard to the nature of the business, tax implications and liability implications. Options can include so-called "C" corporations, Subchapter S corporations, limited liability companies, limited liability partnerships, general partnerships, limited partnerships and various combinations of those entities. And the job does not stop once the entity is formed. The most important aspect of this matter is to provide a plan for what happens in the event of a partner, shareholder or member's death, disability, voluntary withdrawal, involuntary withdrawal, deadlock in the operation of the business, etc. These activating events trigger certain remedies such as a buy-out. Failure to have such an agreement can result in an uninvited partner. If our law firm did not have a buy-sell agreement, I could transfer my interest in the firm to my wife (who, although she is a lawyer, has not practiced in many years). Imagine the surprise of my fellow principals when my wife shows up for work on Monday morning following the transfer of my interest in the firm to her (well, maybe that is a bad example -- they would probably prefer it!).

Many times, in the family business, the opportunity to get things right from the outset is lost because the business is already in operation and did not establish these safeguards at the outset. If you are in this position, stop right now, put this article down and call your lawyer. Fix the problem. That is how important this issue is. One of the things that should be more important to you than your business is your family. Failure to fix this problem could devastate both.

The same issues exist with the management of the business. There should be a clear written understanding of who does what, when and how. If a question ever arises, the written agreement can be relied upon. The goal of these documents is to plan for the worst and hope for the best. In a well-run family business with cooperative participants, once these documents are established, they are never seen again. There is never a reason to refer to the rules because everyone knows them and abides by them. But when circumstances change because of death, disability, transfer of an interest or retirement, the smooth sailing ship can encounter turbulence. Having a written agreement can smooth the waves and allow clear sailing once again.

My apologies once again that some of this was repetition -- but this is important enough to repeat!