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It is striking how many entrants on this year’s Birmingham Post Rich List have generated their wealth through a family business.

It shows just how important family companies are to our economy in the Midlands; they can be significant employers and job creators.

Much of the success of family businesses can be put down to a common culture and aim, and to taking a long term view.

However all is not always sweetness and light within a family company.

As new generations of family emerge the number of family members involved in the business, either directly or indirectly, can substantially increase.

This can raise many questions such as:

• Who will be the next CEO of the business and how will he or she be selected?

• Are family members automatically entitled to be employed by the family business?

• What remuneration should they get?

• What dividends should be paid to family members who own shares but do not work in the business?

• How much time commitment is needed from family members in the business?

• Is there a common consensus as to the direction of the business and is this understood by all?

If these questions are left unanswered the uncertainty which results can create significant tensions within the family which, with time, might prove to be very damaging to the business.

Different members of the family will be looking for different things from the business, and this needs to be understood and recognised. Is there a way of avoiding some of these problems?

The good news is that a family constitution or “charter” can do a lot to help. These are agreements reached by the family and set out the grounds rules for the relationship between the family and the company. The family charter can cover the issues raised above and also set out things such as:

• How the family wishes the business to be run;

• The family’s goals and the long-term strategy of the business;

• How and when family members are to be employed and on what terms;

• The rules around passing shares to the next generation.

Family constitutions are increasingly being adopted by well-run family businesses. It is worth exploring how a family constitution can benefit your business.

• Matthew Hansell is Head of Private Wealth at law firm Mills & Reeve LLP. He specialises in acting for business owners. He is one of the very few professionals in the Midlands to have the STEP Advanced Certificate in Family Business Advising.
www.mills-reeve.com