I will never tire of repeating it: an orderly generational transition in management and ownership is perhaps the main key to the long-term survival of family businesses. And a very useful tool to achieve this is the family covenant or protocol, a comprehensive agreement in common for all members of the business family.
Índice
What is the family protocol
The family agreement or protocol is a set of carefully detailed agreements, and is an essential tool for planning and facilitating an orderly generational transition in the management and ownership of the family business.
It is a legal document, but it is separate from the rules governing corporations and is not a legally binding document in all countries. However, it does have a strong moral commitment and can be part of broader legal agreements within the corporate structure of the company. Violation of the family protocol can lead to major internal conflicts. It is therefore important to provide for clear conflict resolution mechanisms and sanctions in case of non-compliance.
Objectives
The main objective of the protocol is to ensure both the internal cohesion of the family and the durability of the company within the family. To achieve this, it can be broken down into several secondary objectives:
- Prevent disputes from arising. It does this by setting clear rules for interactions between family members, ownership and the company.
- Ensure the sustainability and progress of the business. To this end, it dictates how the business should operate and the level of family involvement.
- Forge a common project that strengthens family ties and fosters a unified commitment to the business.
What content should be included in the family agreement or protocol
Every family business is different. For this reason, the family protocol can and should cover a wide range of issues. From those of a legal nature, to ethical or moral issues, to the values and culture of the family, etc. Some of the points it usually covers are succession in the management and ownership of the company, family employment policies, distribution of profits, conflict management, responsibilities of family members and criteria to be followed in decision making.
The formula to be used is the integration of contractual clauses signed by all family members. These have a binding effect between them and can influence other legal documents of the company, such as the articles of association.
Unlike the partnership contract, which is an agreement that focuses on the creation and management of a business with the aim of distributing profits, the family agreement assumes that the company is already established and aims to harmonise the relations between the family members and their company. For this reason, no capital contributions are required from the signatories, as the family members have already been allocated their shares in the company.
Family businesses are a living entity, so the protocol must be reviewed periodically to adapt to changes in both the family and the business.
How to create a family protocol
Family businesses are complex and involve a mixture of personal and professional relationships. Therefore, it is highly advisable, if not essential, to have external advice from lawyers who are experts in family businesses. In any case, all family members with an interest in the company, from those who are active in its management to those who are simply shareholders or heirs, should be involved in the drafting. Because its successful implementation requires unanimous agreement.