Family Businesses

3 Key Agreements Every Family Business Needs in Writing

3 Key Agreements Every Family Business Needs in Writing
Image credit: Daniel Foster | Flickr
Reader Resource

Position yourself for growth in 2017—join us live at the Entrepreneur 360.
Flash Sale—save up to $200 on registration. Ends Thursday. Secure Your Seat »

Family business law is not family law. The latter deals with divorce, child custody, alimony and related issues. Family business law deals with starting, growing and transferring your business. The tricky part is, there isn’t a body of law called “family business law” (although I hope to change that). It’s an intersection of many practice areas, including business law, trusts and estates, property law, securities, non-profit law (ex: for family foundations) and yes, even family law. When looking at legal agreements, you have to borrow from these practice areas and apply them to your family business.

Family business agreement.  

In an ideal world, a hand-shake would be sufficient for you and adult family members to launch your family business. That’s difficult to do these days, especially when family members have to protect and care for their children, spouses and estate. A family business agreement gives you legal protection and can serve as a guiding document. If you make decisions contrary to what you agreed upon, you can refer to it. You can use a number of agreements, such as a general partnership agreement or limited partnership agreement and more.

In Broccoli v. Broccoli, brothers of a family business fought over a $64,000 loan (among other things) that one brother issued to another family corporation. There weren’t any agreements to govern how, when and why the brothers could issue loans. Rhode Island Supreme Court Justice Lederberg wrote this about the case, “The facts of this case reveal a bitter and long-running battle among three brothers, Biagio, Benedetto and Anthony Broccoli, that in the end destroyed their fraternal bonds and Delaine Auto Body, the family business started by their father in 1955.” That’s a strong statement and perhaps a warning that families working together do need business agreements.

On a side note, I clerked for Justice Lederberg. She is now in a better place, and may she rest in peace.

Related: How to Protect Your Personal Finances From Business Risks

Family business buy-sell agreement.

A buy-sell agreement determines what happens to your family business in the event of a disability or death of one or more family members. You can also use it to determine the value of the business. The agreement is binding on third parties, but also heirs and relatives. It’s a way to keep the business going when unexpected or tragic events occur that make it difficult or impossible for you or a family member to continue with the business activities.

In Etienne v. Miller, two brothers asked the court to enforce their buy-sell provision in a trust agreement. The defendants were beneficiaries of the trust and contested the brothers’ buy-sell agreement because they felt the brothers undervalued the family business. The court respected the brothers’ decision and the buy-sell agreement stood. These agreements are enforceable and you get to control what happens to your family business when you put one into place.

Related: How to Divorce-Proof Your Company

A prenuptial agreement.

A prenuptial agreement spells out what happens to the family business in the event of a divorce. If you’ve inherited a family business, started one prior to marriage, or are on your second marriage with children from a prior marriage, then a prenuptial agreement is a legal option to consider.

In Landers v. Landers, the trial court awarded half the value of the family business, a machine shop, to the husband. The wife was awarded custody of the children. The shop was the couple’s most significant marital asset. Here’s what the court of appeals said about the trial court’s decision,  “With no further explanation, the judge then valued the company at $150,000, a sum less than half of the expert's valuation and a decision contrary to the weight of the evidence.”  The court of appeals ended up valuing the family business at $332,000 and awarding the wife one half her share of the marital estate. Let’s say the wife’s father handed her the family business prior to marriage. A prenuptial agreement may have ensured that she retained 100 percent of the business.

The cases brought each year prove that agreements, even among family, is necessary. If nothing else, you can clearly state your desires and vision in these legal agreements.

Related: When a Tattoo Equals a Lawsuit