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As many as 80 per cent of small businesses in Canada are family enterprises. And while the benefits of self-employment and entrepreneurship can include financial freedom and control over one's career, there are many factors families need to consider before building a business together.
Establishing firm boundaries, best practices and expectations are essential to avoid conflict that can destroy even the most successful businesses. Are you considering bringing a spouse into the family enterprise? Or is there already spousal friction that may be affecting its operations? Business owners can learn valuable lessons from a divorce lawyer about how to protect their financial lifeline.
Preparing your spouse
Strife at home can negatively impact relations at work unless couples are skilled at communication and conflict resolution. They need to implement a strategy, or best practices, for keeping work and personal life separate.
Couples entering into business together need to clearly answer several questions, including: Is the joining spouse appropriately qualified or is there a need for training or additional support? What are both parties' expectations of the spouse's role? How do you deal with conflict? What is your work style and how do you define work-life balance?
A good way to avoid pitfalls is to create two important documents at the outset: a cohabitation (or marriage) agreement, and a shareholders agreement.
Planning for the possibility of divorce
A marriage agreement is essential when bringing a spouse into the family business. Understandably, many couples avoid having the conversation around, "What if we don't make it?". While it may be somewhat easier to discuss a marriage or a cohabitation agreement at the outset of a relationship, it's extremely difficult and emotionally charged when a marriage is going well or fairly well.
A marriage agreement helps to force the couple to discuss topics that they may be thinking about, but are too afraid to bring up. It's important to cover topics such as expectations of financial support in the event the relationship breaks down, how to divide assets upon separation, and how to work together in order to protect the family business if there is a divorce.
Protecting the business
While a marriage agreement guides the legal and financial responsibilities of the couple in the event of a separation, the shareholders agreement will define their responsibilities to the business.
Whether there is a need for a formal shareholders agreement, or whether a simple common understanding would be sufficient, below are popular topics and questions for business families to cover:
Establishing Roles: What are the roles and responsibilities of each spouse in the business while they work together?
Salary: How is compensation determined?
Plan for Failure: In the event of a breakdown of the relationship will one person exit the business? If so, how? Will there be a transition plan to transfer the person's knowledge?
Exit Strategy: Will the exiting spouse's shares be purchased, and how will you determine the value of the business?
Dependents: Will children or other family members be allowed to work in the business and, if so, under what circumstances?
Even if one spouse is a shareholder and the other will work in the business but not own shares, it is still recommended that both develop a solid understanding of these issues.
Preparing your family, the owners and the business
Whether you are thinking of establishing a family business, or have done so already, a helpful tool is Three-Circle Model that is widely taught in business programs. Members can operate in one (or more) of three different but inter-dependent circles, or systems: member of the family, owner of the business, or someone who is not necessarily a shareholder but who works in the business.
When your spouse starts to work in the business it will have an impact on each of the three systems.
The family will feel the added responsibilities of the new spouse working in the business and the children will need to adjust to a new reality.
Shareholders will need to contend with the new person's impact on the dynamics of the business.
Lastly, the business itself – the employees, the suppliers, the service providers – will also be impacted by onboarding of a family member.
It's important to identify the circle in which each family member operates, in order to understand and recognize the effects that a change in any one system will have on the other two. Insufficient preparation to change in any of the three systems is a common mistake that can have a negative impact. A Family Enterprise Advisor specializes in providing support and guidance to family businesses, ensuring that each of the three systems is adequately prepared for the addition of a new individual.
While it can be emotionally challenging, investing the time and effort upfront to tackle these important issues will help prepare you, your spouse and your family for greater business success.
Nathalie Boutet is a family-law lawyer, mediator and certified Family Enterprise Advisor in Toronto. She provides unique strategies and out-of-court results to the human, legal and financial matters related to separation or divorce within businesses and family enterprises.