Family charters and business succession planning

Running a family business can have many complexities. One of those is the family itself. We explain the importance of family charters and why having one in place can help the business steer a clear course to continued success and deal with tricky and sensitive issues around business succession planning.

What are family charters?

Family charters are statements of intent or agreements entered into by the family members in relation to a family business. A well planned and drafted charter serves as a roadmap for future generations, addressing issues such as family business succession, wealth distribution, and philanthropy.

A family charter can be legally binding, not binding or only partly legally binding and set out:

• How the family agrees the business should be run.

• The family’s goals and the long-term strategy for the business.

• Policies on dividend distribution, investment strategies, and financial management.

• Guidelines for the distribution of wealth among family members, including inheritance.

• Procedures for resolving disputes related to the family business.

• Policy on reviewing and amending the charter at certain times e.g. on death of a family member, or including new family members as part of the business.

In some cases, family charters may set out broad, non-binding principles relating to the family’s policy on certain matters, with those principles then being enshrined in a binding form in the company’s articles of association or a shareholders’ agreement. A good example of this is the family’s policy on ownership of shares.

What are the advantages?

By having a charter in place, this can help to bring consensus amongst family members on how the business should be run and put some structure on the difficult overlap between family and business.

As families grow, in a relatively short period there can be a substantial increase in the number of family members with a direct or indirect involvement in the business. For example, two brothers might set up a family business, each brother then has two children who then in turn each have two children. By the time the members of the third generation have become adults, there will be a large number of family members who may have some sort of connection or involvement with the business, which could extend to spouses who may have become involved in the business.

Business succession planning - future generations

This can bring with it a number of different issues and complexities such as:

• How will the next managing director of the business be chosen? -will he or she come from within or without the family and how will he/she be agreed upon? What if some family members want to be involved in the business but others wish to exclude them?

• Who should be employed in the business and who can sit on the board? - in what circumstances will family members be removed from employment or directorship or even lose their shares?

• Who is entitled to own shares and what happens if someone wants to sell their shares? - what are the succession rights, can shares be passed to spouses and will there be any restrictions on what happens to those shares in the event of a separation/divorce?

• Legal and Tax Considerations - addressing legal and tax implications, such as inheritance tax and business asset transfer.  

• Exit strategy

• Relations with non-family employees - how will the family avoid a feeling of exclusion amongst members who are not employed in the business and/or are not shareholders?

No two charters are the same

Family charters, much like a shareholders agreement, are individual to each business and its unique circumstances – there is no one size fits all document and each will be drawn up to reflect the family’s own requirements. Some charters may be very short while others can be more in-depth and lengthy, particularly where there is a large family or the business is more complex.

For businesses looking to draw up a family charter or who need advise on business succession planning, please do get in contact.