Family business

In the UK, there are believed to be no less than 9,000,000 employees working in family owned businesses, making these types of business the most common type of business in the UK.

With family business, this creates some unique potential advantages but those same potential advantages which can work so well, in terms of closeness and mutuality of interest, can also prove to be the biggest weaknesses.

Whilst many of the same principles and recommended clauses as are used in shareholder or partnership agreements also apply with family businesses, there re some additional considerations which should be taken into account in a recommended agreement between family members. An agreement for a family business is also often known as a Constitution Agreements rather than shareholder or partnership agreement.

Darlingtons can assist in drafting up this vital form of contract for your family business, so please get in touch with us for a free appraisal and a fixed fee quote from David Swede, a very senior and experienced commercial solicitor.

A typical family business constitution might include the following sections:

  • Agreement on what is the business strategy, vision and values
  • Agreement on a clear management structure
  • Policy on family succession and exit
  • The rights, responsibilities and obligations of family shareholders who do not work in the business
  • Whether some external board members should be appointed as a way of minimizing the risks of disputes caused by personal frictions
  • A policy on paying spouses a salary bearing in mind this can be tax efficient but also may be challenged by the Inland Revenue
  • Consideration of a policy on family members co-operating if the majority agree to seek finance from an external lender and the possibilities of personal guarantees being required.
  • Provisions dealing with adjustments that may be needed to persuade external investors to invest if such investment is needed in the future to invest in shares.
  • Consider what happens on divorce of a shareholder family member. Inserting provisions in a shareholders’ agreement may assist or encouraging family members to enter into prenuptial agreements but these are not foolproof and another alternative is for shares to be held in trust.
  • The possibility of imposing requirements that anyone ceasing to be a family member must agree to sell shares back to the company, at a pre-agreed price.
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