• Does the firm have the right to approve transfers of equity? Can a partner simply transfer shares to her child or would she have to go through the firm? Many firms require that the firm buys and sells all equity or approves all transactions to prevent such transfers or deals with family members.
• How do you choose a CEO? Is there a board that oversees the actions of the CEO? How effective is the board?
Larger firms with more partners will have more tools at their disposal to create a formal process protecting the partnership. Small firms may find themselves with fewer options, but still, this could be a good opportunity to call your corporate attorneys for advice and perhaps a revision of your governance documents.
Be Prepared For Kids To Leave
Children leave us. It’s a good thing. They are eager to establish themselves, to explore the world, to discover who they are and what they want to do. They frequently reject the ideas and directions of Mom and Dad precisely because they came from Mom and Dad. They may have bigger ambitions than to take over the family firm or they may choose different careers. Their lives may simply take them in different directions. For that reason, they often leave the firm. Or worse, maybe after the parents have passed it to them, the kids eagerly sell it to the highest bidder.
Any plan for the children later heading the business needs to account for this. It’s one of the biggest reasons bringing family into the business is problematic. Thus, an open and transparent dialogue is necessary not just within the firm but also among the family members.
Family Will Make Financial Decisions Very Difficult
The worst financial deals and worst conflicts I have ever seen have been among family members. A father selling his business to a son. A wife setting the salary of her husband. A son-in-law buying the business of his father-in-law. These situations are emotionally charged because families are emotionally bonded. That means financial logic often flies out the window during business transactions among them.
Parents might impose harsh conditions on their children for buying. Children might think they’ve always been treated poorly. Where an employee may think, “This is not the raise I was hoping for,” a daughter will think, “You have never appreciated me! (And you never took me to skating practice!)”
So when it comes to making financial decisions, these are good times to rely on third parties—your partners, accountants, consultants and valuation experts.