From the April 1998 issue of Entrepreneur

Suggest to the senior generation of a family business that giving employment contracts to family members might be a wise idea, and you'll run into a minefield of resistance. "They're not necessary--we love and respect each other" or "It would run counter to our business's culture" are typical responses.

It's only after a problem flares up that some families realize employment contracts would be helpful. "Family businesses can never have too much communication," says Jeffrey Wolfson, partner in the Boston law firm Goulston & Storrs and chair of Northeastern University's Center for Family Business in Boston. "A document that provides important information--job and role definition for the family member and defined expectations and security for the company--can do nothing but improve communication."


Patricia Schiff Estess writes family business histories and is the author of two books, Managing Alternative Work Arrangements (Crisp Publishing) and Money Advice for Your Successful Remarriage (Betterway Press).

Contracts That Work

Contracts are not for every family member, of course. "When a young adult comes into the family business, it's a trial for everyone," says Dr. Ralph M. Daniel, a business psychologist and principal of California Family Business Institute LLC in Santa Barbara. "You never know where the 21-year-old will be in three months, and you don't want to saddle the company or the young adult with a contract." But the majority of the time, it makes good sense.

From the family member's point of view:

  • The contract provides peace of mind. Take the example of a company that wants to lure back a family member who has left the family business. If he or she has to leave a rewarding, well-paying job, a one- or two-year employment contract would recognize his or her need for some security.

The same holds true when older family members begin phasing out of the business. Knowing they will have real responsibility and will be financially secure in their semi-retirement eases the angst associated with leaving the company.

  • It helps clarify management opportunities. "I'm working with a company where the three daughters want employment contracts," says Daniel. "They're afraid that if they stay without them, the company--traditionally managed by the male relatives--will continue to deny them opportunities for growth. Negotiating the written agreement forces the family to address this question."
  • It provides an incentive to be productive. The contract, by its very existence, says the family business doesn't have to hire people just because they're related, that the family member employee is special and that the terms of this agreement are custom-crafted to reflect that.
  • It offers definition. When David Schulman was asked by his grandfather, Jerome Schulman, to come into his Chicago manufacturing business, David took a chance and joined the company. Early in his employment, however, he feared he'd made a big mistake: The warehouse lessee to whom he had leased the empty building next to their manufacturing facility didn't want to renew his lease. Since family members--16 in all--owned the huge building, they were going to get stuck with the empty building and an annual $100,000 tax bill unless they did something.

So David went to work. In 1994, he and his grandfather formed Grand Warehouse Corp., a public warehousing corporation, and David was put in charge of operating it. In six months, the 24-year-old had the space filled again. The problem was, David wanted complete authority over what to do with the profits, and some family shareholders were unhappy with that arrangement. "We drew up an employment contract that guarantees me a salary, stock incentives, a car and managing control of the company," David says. The definition of these perks was just what he needed to stay.

From the company's point of view:

  • It minimizes the potential for conflict. This is especially true when more than one family member is involved in the business or when business ownership lies with two or more families or the family and some investors, says Wolfson.
  • It's a sign to nonfamily employees that family members are expected to perform. "If a family member doesn't live up to the terms of the contract," says Daniel, "it's easier to terminate the person."
  • It protects the business. When family businesses have confidential information, such as secret manufacturing processes or recipes that have been handed down for generations, they usually add a noncompete provision to the contract. "If limited in the time period and geographical areas it spans and in the industries it covers," says Wolfson, "[the provision] will generally be enforcable in court."

Proper Packaging

Any negotiation can create resentment if not presented in the proper fashion. That's why Kathleen Misturak-Gingrich, a partner in the Philadelphia law firm Manta and Welge, insists all parties in the agreement understand the contract is intended to protect everyone. "I encourage the parties to talk about what each wants and what concerns them, and to think through what they want to accomplish in the business," she says.

Some advisors encourage the family member and the company, whether represented by a management team or the senior generation, to put in writing the provisions most important to them. Even if the provisions are revised during the negotiation, at least the parties have had an opportunity to explain what they're after and be acknowledged and understood.

While it's wise to include a re-negotiation clause in the employment contract, the re-negotiation itself may never need to take place. "At some point, if the family member is productive and motivated and wins the respect and admiration of senior management, the formal employment contract might be put in a drawer and deemed irrelevant," says Wolfson.

Until that point, however, written contracts can head off or minimize the dissension and bickering that have wrecked many a family business.

Contact Sources

California Family Business Institute, (800) 952-CFBI, http://www.cfbi.com

Grand Warehouse Corp., 4350 W. Ohio, Chicago, IL 60624, (773) 265-0403

Kathleen Misturak-Gingrich, c/o Manta and Welge, 2000 Market St., 6th Fl., Philadelphia, PA 19103, (215) 851-6626

Jeffrey Wolfson, c/o Goulston & Storrs, 400 Atlantic Ave., Boston, MA 02110