A shareholder agreement should address:

- financing the business, whether by issuing more shares or by loans from shareholders or banks or others; 

- how profits will be distributed or reinvested;

- internal management - which decisions will be made by shareholders, which will be made by directors, and which will be delegated to management;

- the resolution of disputes;

- shareholders’ rights, if any, to choose directors; 

-  the number of directors, how they will be elected and their powers;

- how and when shares can be transferred or issued; and

- decisions on the admission of new shareholders.

After an agreement is negotiated and signed, it should be reviewed every few years and when any important change is made, like the admission of new shareholders.  Unless the agreement is kept up to date, it will lose its effectiveness.

 2. Active board of directors A common vision and a way to resolve differences among owners is critical, but the owners will also need constructive advice on managing and growing their business.  In most private companies, a small group of individuals will fill several different roles.  The separate roles of shareholders, directors and officers become mixed, and distinctions fade. The result is that the special function of directors can be overlooked, and the company can miss out on the unique contributions they can make. Independent outside directors can serve a useful role by providing owner/operators with impartial and honest advice.  Because these directors do not have an agenda to advance or service to sell, they can speak candidly in a way that inside managers or outside professional advisors cannot.  They can also contribute to the future success of a company by providing a wider pool of knowledge, experience and ideas.

Active outside directors can:

- help with the strategic growth of the business;

- act as a confidential “sounding board” in delicate situations;

- offer new perspectives and encourage creative thinking;

- monitor the performance of officers and hold them accountable for decisions; 

- take an objective view of disputes; 

- offer advice, guidance and experience to help owners to prepare for future challenges.

Some outside directors are concerned about exposing themselves to personal liability.  If potential liability is too intimidating for prospective directors, a president can create an advisory panel which would advise but not make decisions.  The members of the panel would not be exposed to personal liability.

3. Regular family meetings While outside directors can give owners a fresh perspective on their business challenges, owners also need to promote co-operation and unity within their families.  Regular family meetings can help to improve communication, strengthen common values and goals, resolve disputes, prepare the company for challenges or change, and plan for the future. 

 Here are some suggestions for planning and conducting a family meeting:

Each family has its own ways of communicating and making decisions. These customs should be reflected in the style and structure of the meetings. 

- Ask participants what they feel should be discussed.  Suggestions should be gathered into an agenda which is distributed prior to the meeting.

- Invite someone to chair the meeting – the chair should be effective in managing discussions according to the agenda. 

- Consider inviting a facilitator if the topic is likely to cause tension.

- Invite professional advisors to address technical issues as needed. 

 Keep minutes, noting especially any matters that were resolved or which you need to discuss further.  Circulate the minutes after the meeting.

The practice of regular family meetings may seem unnecessary and formal, but experience shows that it can bring great benefits over time.  It can help reduce stress and disagreements at crucial times, and contribute to the continuing focus and prosperity of the business.

4. Succession Plan In addition to a shareholders agreement, active outside directors, and regular family meetings, ultimately the long-term success of a family business requires a succession plan.  This is “the final test of greatness” according to Peter Drucker.  It is a test that many businesses fail.  Only 30% of family businesses are successfully transferred from the founder to the next generation of the family.  The chances of a successful transition – whether for ownership by the next generation or for eventual sale – are greatly improved if the company has a succession plan.  .

A succession plan is beneficial in several ways:

- If a family wishes to transfer control of its business, then a good plan will help ensure a smooth transition.

- If a family decides that it wants to sell its business, then a succession plan can provide for an orderly sale to existing management or to an outside party.  It positions the family to sell the business at a time of their choosing, which will help maximize the sale price.

- A succession plan can mitigate the disruption of the business if its founders suddenly retire, die or are incapacitated.

- It can support the internal development of future management.

- It will also help an owner realize the value of his or her ownership interest without straining the business’s financial condition.

Given these benefits, it may at first seem puzzling that more family businesses do not have succession plans. Owners, however, often have difficulty making decisions about what role their children should play in the future, and families are often dependent on the business to maintain their lifestyle. Personal rivalries, discomfort thinking about death and disability, and the natural unwillingness to give up control, can also make it harder to see and act on the true long-term interests of the business. The following principles will help overcome these challenges and will contribute to the development of a sound plan:

1.  Begin now.  To develop a plan, families will need to consult with legal and financial advisors and with members of the family, including those who are not directly involved in the business. 

2. Communicate.  Owners should communicate with family members who are working in the business and those who are not.  By communicating, they can foster realistic expectations and gain consensus.

3.  Be fair.  Being fair to one’s children does not mean treating them all the same.  Assess the competency of each child and determine whether that child is suited to take over the business, or whether the business should be sold. 

4.  Work together.  Try to develop a shared vision among the family of where the business is going. 

5.  Be flexible.  Ensure the plan can accommodate changes in the family, deaths, unexpected events, and opportunities.

Experience shows that family business benefit greatly from having an up-to-date shareholders agreement, an active board of independent directors, regular family meetings, and a sound succession plan. Developing or improving any one of these things can seem daunting, especially when owners and managers are focused on the day-to-day challenges of a growing business. But those challenges will be met more effectively – and the long-term success of the business will be more secure – if action is taken now.

Michael Henry, Houser Henry & Syron LLP www.houserhenry.com