Family Business Constitution

A Strategy to Avoid Disputes

Drafting a Family Business Constitution or Family Charter is a way of formalizing the “family talk” that goes on in a family business - a document that addresses policy, practices and procedures. It is a way to better connect and infuse the values of the family into how the business is operated. It helps to define how the family interacts with the business – and each other as shareholders in the business.

“One of the important reasons to draft a Family Business Constitution or a Family Charter is quite simple – they help prevent conflict in the business and within the family,” according to top family business expert Don Schwerzler. “The importance of having a Family Business Constitution grows as the business grows and the issues become more sophisticated and complex.”

Schwerzler has been studying and advising family business entrepreneurs for more than 50 years and is the founder of the Family Business Institute, an internationally recognized family business advisory group headquartered in Atlanta, GA.

What makes up a Family Business Constitution or Family Charter?

"Every family business is unique and complex in its own way. What makes good sense for one family business could be wrong for another family business," notes Schwerzler. "Simply stated, the components should answer the questions that create conflict in a family business."

A few examples of the questions to be considered include:

Who will lead the family business?

What will be the criteria for selecting the leadership positions for the business?

What are the rights and responsibilities between family members who are active in the business and family members who are inactive in the business?

Who serves on the board of directors – how are they selected?

What is the compensation policy for family members active in the business?

What is the compensation policy for family shareholders not active in the business?

What are the policy guidelines for hiring family members?

What are the policy guidelines for terminating a family member?

Who should own shares in the business?

What happens to ownership shares when the share owner marries, divorces or dies?

Should ownership shares be given to non-family executives?

What are the long term goals of the business?

When should the business be sold?

How is executive performance measured – what are the benchmarks?

How is the performance of the family business being measured?

What are the long term goals of each member of the family?

How do the values of the family influence the running of the business?

How are family members active in the business held accountable for their actions?

How is the Family Business Constitution or Charter amended?

and many more…!

Creating a Family Business Constitution or a Family Business Charter should be a collaborative effort amongst family members that produces a document that goes beyond those issues that cause conflict – it should also be a document that celebrates the success of the family business and honors the legacy of parents and grandparents and other family members whose sacrifices and contributions have made the family business successful.

If you have questions about creating a Family Business Constitution or a Family Business Charter for your business, use our Family Business Help Desk – we are happy to help. Having an expert, someone who deals with family business dynamics, to facilitate the discussions just makes good sense – especially when there is an impasse or when specific issues are being avoided but need to be addressed.

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