Optimise your family business and safeguard your relationships with a Family Business Constitution

Family-owned businesses make up a significant portion of all businesses registered and operating in Africa. In fact, family-owned businesses are today recognised as vital participants in, and contributors to, the continent’s economy.

Family-owned businesses face their own set of unique challenges. As they grow and develop, personal relationships between family members often start to become more complex, more difficult and in some cases, more fragmented. As a result of these dynamics, fewer than half of all family-owned businesses are able to survive a generational change in ownership, and a very small percentage prove sustainable beyond the third generation.

According to Mark Achiampong, Head of Commercial and Business Banking at First National Bank, the majority of family-owned businesses fail by not planning for succession and other events including family conflicts, divorce and transition of leadership. This does not need to be the case, he says.

A family-owned business has the potential to go from strength to strength through generations, provided that appropriate governance frameworks to manage the family dynamic are adopted and agreed to by all the family members.

“A family business constitution is the ideal way of managing the family dynamic within a business and ensuring that relationships are protected while the best interests of the business are advanced,” says Mr. Achiampong.

He describes a family business constitution as a written document that exists alongside and must be aligned with the other business governance frameworks, such as a shareholder agreement or memorandum of incorporation. It sets out the rights, values, responsibilities and rules that apply to all family members as stakeholders of the business whether active or passive.

“A family business constitution does not need to be complicated and can be tailored to the evolving requirements of the family-owned business as the family grows and new spouses, partners and generations are added,” Mr. Achiampong explains.

He advises family-owned businesses to introduce the business constitution as early as possible, when the family and business structure are as uncomplicated and decisions regarding the guidelines or rules to be included in the framework can be made objectively. He however points out that a constitution can be established at any point in a business’ history and doing so can avoid significant conflict down the line.

“In our experience at First National Bank, while some of the decisions that need to be made when setting up a constitution can be uncomfortable, especially for a long-standing business, the relatively minor pain of making those choices now pales in comparison to the potentially massive, and possibly business destroying conflict that a family constitution can help prevent in the future,” Mr. Achiampong explains.?

He adds that conflict avoidance is not the only reason for, or benefit of, a family business constitution.

“In addition to setting out plans and structures to deal with situations that could arise during the course of business, the family business constitution can be a highly effective recruitment, remuneration, compensation, retirement and succession planning vehicle, and it is an excellent way of maintaining certainty within the business in the event of a family?tragedy, like severe illness, injury, divorce or even death of a family member who is a shareholder,” he says.

“Sustainability and continuity of a family-owned business simply require clarity on how that business and its stakeholders should be governed and by making the rights, responsibilities, expectations, and conduct of existing and future family members 100% clear, a family business constitution helps secure generational wealth and unity, and does away with risky assumptions and uncertainty that could destroy the business and ruin relationships.”?