I’ve often joked with clients that the difference between doing business with family and independent third parties is:
"With third parties, you should have written agreements, with family those agreements should be laminated."
The importance of these shareholders agreements in family owned businesses cannot be understated.
The challenge from the outset is the history of emotion (and future obligations) that comes with family. The solution is quite simple but difficult to actually implement.
There is an implied trust, that family members believe other family members will always have their best interest at heart - especially when times get hard. History shows that the longer time goes on the less likely this is to actually happen in family owned businesses. The following are simple examples that impact the relationship:
- Spouses and Partners
- Both new partners and separation and divorce
- Illness within the group
- Economic downturns
The scenario I want to take you through today is one that people often don’t consider. What happens to your family owned business when a third party steps directly into the feet of your business partner who happens to be a family member??
The background to this example is simple - a Father and Son operate a business that uses a commercial property owned by one of the Father’s entities. This property is critical to the long term success of the business. Unfortunately the Father’s Entity which is the Landlord encounters significant financial distress and as a result, liquidators are appointed. The business does NOT have a formal lease and does not make regular rent payments.
The business is structured in such a way that it is initially protected from the landlord’s distress. Unfortunately, as no legally enforceable agreement is in place the liquidators have the right to sell the property.
This sale would have a disastrous impact on the business and ultimately force it to close - all for the sake of a lease. Again what we are looking to protect the family and business from is external parties and actions that could be out of the family’s direct control.
In this simple example a lease would provide the business with sufficient security and protection from liquidators, as any potential buyer for the commercial premises would still be required to adhere to the valid lease.
Family owned businesses should be run in the same way any corporate enterprise would be run which means having some documentation in place to protect its members no matter what the future may bring – such as:
- Ensure you have written lease agreements in place
- Ensure any loans to directors / shareholders / associated persons are in writing and don’t trigger Div 7A issues with the ATO
- Ensure any family members on the payroll have written employment contracts and position descriptions
- Agree on a hierarchy / structure so everyone knows who is in control of each area of the business
- Agree on a dispute resolution process so there is a way forward to resolve issues when they occur.
PJT offer specialist Family Business advice, and have registered advisors with Family Business Australia. Our experience and qualifications in this specialised area has us well placed to help with your family owned business. Give us a call today for a confidential discussion on any of your family business needs.