Questions we answer in this guide:
- What is a family constitution and when might you need one?
- How do you create the rules to run your family business by?
- What kinds of shared understanding can a family constitution help to make a reality?
Every family business should have a family constitution from the outset. This document can take any form, but it should be clearly and unambiguously presented. It should also be easily accessible to all family members who are involved in the business.
A family constitution is where you should capture your motivations for starting a family business, your expectations and ambitions.
We asked family business experts, Billy Andrew, Susan Hoyle and Liam Entwistle, to collaborate on this guide and explain just what a family constitution is and why it can make such a critical difference to the success of a family-run/owned business.
What is a family constitution?
Your family constitution isn't the same as a shareholder agreement or the legal and formal rules that would be contained in your articles of association if you're going to run your business as a limited company (which is a model that's particularly well suited to family businesses).
Instead, your family constitution comprises the broader rules by which you've chosen to go into business as a family.
These ‘rules’ are your honest and transparent commitments to each other, and they're your agreed positions on how the business should benefit those of your family who are involved today (as a worker or investor), those who might perhaps be involved later in time, and those who are connected to any one family member who's involved.
Putting them together provides a perfect opportunity for you to explore, for example, your attitudes towards risk, your ideas and proposals for how you’ll handle a family illness, a family member change of heart about being involved, how you’d want the business to be managed day to day, or how you all feel today about another family member wanting to join.
“At its simplest, a family constitution is the combination of assumptions, understandings and expectations that exist in every family about 'how we do things around here'.
The problem is that over time a family and their enterprise usually become more complex; the family grows, ownership fragments as it passes down through the generations and the family enterprise changes, which sometimes involves diversifying into other assets and activities.
It then becomes risky for the future health, wealth and happiness of the family and their enterprise to be based entirely on an informal constitution. It’s far better to get something written down and agreed right from the outset.”
Susan Hoyle, Family Business Solutions Ltd
Your family business universe: key documents
The above diagram shows how all the key elements of your family, your business, the formal legal rules and documentation, and your family constitution fit together.
Looked at one way, the family and your business are like the sun in your family business solar system. And then, rotating around you and evolving over time, a number of other core influences and documents sit.
You can see them here:
- your shareholder agreement
- your articles of association (if you’re operating your family business as a limited company)
- your business plan
- your management plan
- your financial model/plan
- your sales and marketing plans
- your HR/culture and values plan
- finally, but by no means least in this universe, your family constitution
In fact, one of the very first documents you should be pulling together is your family constitution.
What goes into a family constitution?
What goes into a family constitution, and how you prefer to record it, is very much down to each family. And if you need help pulling it together, the experienced team at Family Business Solutions is perfectly placed to do so.
The good news is that in terms of presentation, you can’t really get it wrong. What matters most is its content.
However, the more you flesh it out and the clearer you present it, the more effective it will be in supporting you when key decisions need to be made or a major business or family life event arises.
While you can sit down together and work through these kinds of questions together, it’s highly advisable to get someone independent to help you through these discussions and to record them with, and for, you – cross checking at each stage that what they're recording is agreed between you.
Energy can flag, discussions can get heated, some situations proposed for deliberation may seem remote, or unthinkable, and encourage a dismissive or less considered reaction.
Having someone experienced to keep you on track, help keep the energy in the room, and spot the other key considerations that may be particularly significant to what you say and intend can save awkwardness and difficulty later in your business journey.
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