What should entrepreneurs do first when starting a business with family or friends?

Although the family business pattern is very widespread, recently there has been a slight decrease in the number of new companies that are established under the auspices of family relationships according to “GEM Spain Report 2022-2023” from the business observatory Global Entrepreneurship Monitor (GEM). This report shows that although there are a majority in Spain, There are fewer and fewer companies born within the family. The share of the total fell from 72% in 2021 to 69% in 2022.

A possible cause lies in the problems that can arise in a family business. Therefore, before starting any business project, even if it is with family or friends, Experts advise drafting a shareholder agreement. This document is essential for making decisions, assigning responsibilities between partners and planning actions in case the company is not successful.

A partners agreement is not mandatory, but it helps define responsibilities with friends and family

Although the drafting of a shareholders’ agreement is not mandatory, the experience of entrepreneurs and experts strongly suggests signing it. Luis Carvajal, a lawyer at RSM Spain, is convinced of this This agreement provides security to the partners by ensuring that neither party can make decisions critical to the operation of the company without the consent of the others.. For example, it prevents the sale of shares to third parties without the consent of both parties or the majority if there are 3 or more partners.

In the case of starting a business with family and friends, the lawyer assured that it is crucial to carry out the incorporation of the company, with the first rule being the creation of articles of association where a major decision must be made about how the business will be run, whether through a sole trustee, joint trustees or a board of directors. This process can be done with the assistance of a notary or a lawyer who will facilitate the drafting of these legal documents.

In situations where there are two partners with equal participation, the possibility of blocking decisions arises if both have 50% control. “This is where a partnership agreement comes into play, which includes at least two people and provides useful tools for conflict resolution. In the case of three partners, this approach stipulates that the consent of at least two of them is required to resolve disputes makes it possible to effectively manage decision-making and resolve any disagreements in the company’s development” warns the expert.

In addition, he recommends having an attorney draft a partnership agreement that sets out guidelines for resolving potential conflicts. For example, it may be agreed that decisions regarding payments greater than a certain amount require the consent of both partners or a majority of them.

So what does the partners agreement itself entail?

  • Management company: exhaustively specify the regulations that the company will have. For example, from the point of view of negotiations in conflict situations, the decision-making process and the composition of the general meeting.
  • Affiliate Features: describe the partners’ work, the time they devote to the project and the amount they will charge for their work.
  • Entry and exit of partners: The entry and exit of some partners from the company is a more common situation than it seems. Therefore, it is important to specify how these processes will be carried out.
  • Liabilities: both stability and non-competition -unfair competition-. The first forces the partner to remain in his position for an agreed time or established work; and the second will mean that the partners will not be able to compete with each other for the duration of the partnership, even when they cease to be part of the partnership.
  • Intimacy: partners undertake not to disclose information that could jeopardize the company’s operation.

Conflicts between business partners are inevitable, but Marta Beltrán, director of the Association of Family Businesses in Madrid (ADEFAM), assures that “as long as things are well defined, they will go well”. The director confirms that people who grew up with a pre-existing family business They are trained in the business field and live with itso once these kids are part of the business, they will be more open to communication.

A family protocol has similar characteristics to a partner agreement

The concept of a family protocol is similar to a partnership agreement, although it has special features adapted to the dynamics of these family businesses. According to the expert’s explanation, it has the following properties:

  • Advisory committees outside the company: its function would be advise the company in situations where there are different opinions on decisions. This section should address aspects such as identifying who will make up the committee, their responsibilities and any associated compensation.
  • Family Council and Governing Bodies: the family board is configured as a a body that brings together family members connected to the business, including those not directly involved.
  • Their duties range from dealing with business-related family matters to facilitating family communication and decision-making. In addition, this council plays a key role in defining family policies, establishing shared values ​​and advising on generational succession processes.

In larger companies, the expert mentions that there could be the board of directors responsible for overseeing executive management and making strategic decisions, because the executive management headed by the CEO is responsible for the day-to-day management of the company.

In addition, special committees such as finance or heritage may be established to deal with specific issues in more detail.

These bodies and structures provide the organizational base that balances family and business dynamics in a family business. Although for Beltrán, True success lies in “consensus and generosity on the part of all” in decision-making.

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