The family protocol is a document that collects the agreements of a business family. Its main objective is to define the bases, norms and regulations that regulate all those aspects where the family and the company are related. The purpose is that, by leaving the rules clear, future conflicts between the participants are avoided. “It’s better to prevent than to cure”. Popular saying
The first generation creates the company, the second expands it and the third, squanders and closes it. Urban legends like this one, referring to the survival of the family business, unfortunately describe with great precision the sad end of many family businesses.
According to data from the Ministry of Economy, in Mexico only three out of ten family businesses survive the first generation.
The causes of the failure of family businesses around the world are largely (60%) unbalanced family relationships in the company according to data from the Center de Services aux Entreprises (CSE) of Canada.
Not only a low commitment of future generations to the initial project of the founder or an overly generous dividend distribution policy can seriously jeopardize the survival of a family business. To these situations, typical of family businesses, we must add circumstances such as the confusion of personal and business assets, poor or non-existent administration, the lack of internal control that minimizes risks, lack of financial and tax planning, struggles between brothers for succession to the top management or presidency of the company’s board (see Netflix’s Club de Cuervos series) and a long list of points.
One of the most effective legal tools available to family businesses to prevent the aforementioned diseases is the Family Protocol, as the Chinese proverb says “Dig a well before you’re thirsty.”
What is a family protocol?
The main objective of the family protocol is ―Regulate the relationships between family members and the family business, in order to guarantee, in the long term, the well-being of the family and the business‖ (Dr. Juan Manuel Prieto, 2007 ).
The family protocol is a document signed by all current and future partners of the family business, to regulate with clarity and precision the relations between family and business. This is a basic guarantee, especially useful if it is made before generational changes occur in the company. It also serves as a balance between family and business issues.
It is a commitment drawn up by family members, in order to be able to achieve and ensure through current and future generations the success parameter of the business family: Profitability + Family Harmony.
It is the instrument that will help the family to transform itself into a business family, united by a common future.
Specifically, a family business protocol should address at least the following issues:
• Background, principles and values of the family business.
• Rights and obligations of family members.
• Conditions for the incorporation of family members to the company, as well as their remuneration and termination or dismissal conditions.
• Governing bodies of the family business (Family Council, Boards of Directors, Committees and General Manager, etc.).
• Regime for the transfer of shares / participations, as well as criteria for their valuation in the event that any of the partners intends to transfer them.
• Criteria for selecting the successor / s in the company’s senior management or board of directors.
• Provisions regarding the possible entry of third parties into the capital stock of the family business.
• Clauses to guarantee compliance with the Protocol.
• Review and update clauses of the Protocol itself.
• Gentlemen’s Pacts‖, clauses that if breached there is no legal penalty, but moral and is mainly carried out by the business family.
• Sanctions for non-compliance with the rules established within the Protocol.
How effective is the Family Protocol in the face of the problems faced by the Family Business?
The Protocol is above all a means of preventing conflicts between partners or family members, a way for everyone to know what the rules of the game are and how it can help avoid erroneous expectations from current and potential partners.
On the other hand, as a private contract that it is, it is mandatory for the contracting parties, and it can be provided with additional guarantees such as the pledge of shares / participations or certain penal clauses.
The effectiveness of a Family Protocol will depend on the commitment of family members to comply with it, that is why all members must participate in its preparation. Each Protocol must be adapted specifically for a particular company, that is, you cannot copy a Protocol from one company and implement it in another because it simply will not work.
What are the keys for the Protocol to be really useful and effective in order to anticipate future family and corporate conflicts?
The protocol must be carried out when the relations between family members and the company are still fluid, that is, before the possible conflicts that the Protocol aims to resolve arise.
The implementation of the protocol cannot and should not be undertaken exclusively by the members of the family who hold the power of the company, but must be the result of a considered consensus among all current and future partners of the family business. It is about that all present and future partners feel morally bound to the Protocol, beyond a strictly legal point of view.
It is advisable to have the intervention of a professional both in the preparation phase and in the drafting of the Protocol. Essential recommendation not only because of the high degree of specialization that its personalized writing requires for each company, but also because of the impartial and objective perspective that the professional can offer to the signatories of the Protocol.
The Family Protocol can be updated as situations change within the company to adjust to its needs. Having an established Protocol can be decisive in the survival of a family business, so it is recommended that each one have one to be able to solve the problems that arise and more importantly, to avoid them. The elaboration of a Protocol of this type contributes to the institutionalization of the company, it is predicted that the average life expectancy of a family company is 25 years, while those that carry an institutionalized management reach an average life of 50 years.
Once the document that will regulate the relations between the company and the family has been drawn up, the process does not end, it begins.
Experience tells us that the most difficult thing is implantation. Family members must be obliged to comply with it and help each other to respect it, it is the only way to manage the business family so that it can enjoy this valuable treasure hidden in its structure and pass it on from generation to generation.
“Be grateful for what you have because you will end up having much more. If you focus on what you don’t have, you will never have enough. ” Oprah Winfrey
The opinions expressed are solely the responsibility of their authors and are completely independent of the position and editorial line of Forbes Mexico.