Importance of the family protocol and what mistakes to avoid in its preparation

CECA MAGÁN Abogados, experts in family business, when to draw up a family protocol and mistakes to avoid.

30 Oct 2023

When should the family businessman face the elaboration of a family protocol? What precautions should be taken into account? We will try to answer these and other questions below.

As it is known, it is usual in a family business that it is formed by people with different links, either as partners, as members of the administration body or simply as workers. Thus, the only thing they all have in common is that they belong to the entrepreneurial family.

Therefore, there are three fundamental elements that make up every Family Business: the ownership of the company (distribution of the share capital), the decision-making power in the company (administrative body) and the people linked by family ties who are also linked to the company (as partners and/or administrators). Based on these three elements, the legislator has defined the Family Business as "those companies in which the ownership or decision-making power belongs, totally or partially, to a group of people who are blood relatives or related to each other". In addition to these, we can consider as another important and configuring element of the Family Business the fact that it has a vocation of continuity over time and therefore through different generations.

Therefore, the main interest of every business family will be to try to develop mechanisms that allow them to keep the capital stock in their hands over time (restricting the transferability of shares or participations), as well as to entrust the administration of the company to members of the family (establishing the ways and requirements for access to the positions). For which, and as we have developed in several posts in this blog, the Family Protocol becomes an ideal instrument to regulate these matters, being evident that the main concern of a business family that grants a protocol is to maintain the family character of its company (vocation of continuity), avoiding the access of third parties outside the family, both to the social capital (property) and to the administration (management) of the company. That is why the Family Protocol is always a necessary instrument.

Now, according to our experience, one of the questions that we face when advising family businesses is when is the best time to start preparing a family protocol. It is sad to recognize that, as advisors, we often have to face a reality that is impossible to manage, where, when we are asked for help, the last frontier of understanding has long since been crossed, making it impossible or very difficult to sit down at a table with the different members of the business family, each one with their interests, their criteria already formed and an obvious conflict on the table.

When should the family protocol be done?

So, what would be that moment? Obviously before reaching a situation of irreversible conflict and tension. The family protocol should be understood as a suitable tool to regulate the business succession both in the ownership and in the management and management positions. Therefore, the optimal moment would be closely related to the generational handover of family members. Obviously, a family protocol is made with a vocation of permanence and continuity, but it does not have to be a text that remains crystallized, immovable in the sense that it has to be equally valid for different generations with different interests and socioeconomic realities. Each generation can have its own family protocol. The important thing is to know how to anticipate this need and, undoubtedly, the time is now. The family protocol serves as the beginning of the generational transition prior to succession.

Why do we say that this is the right time?

Why do we say that this is the right time? Because it is the moment when both generations (the incoming and the outgoing) are still working together to achieve the company's objectives, being people who in principle have grown up with the same values, education, etc., allowing the risk level of conflicts between family members to decrease substantially. Obviously, each case is different, being the circumstances that may arise different, which may advise a more agile reaction in the decision making process.

What mistakes should be avoided in its preparation

However, even when we are at an ideal moment to start preparing and negotiating a family protocol, we must be able to avoid mistakes in its preparation due to the risks associated with them. Among them we can highlight the following:

Define at the beginning of this task what the ultimate objective should be, as well as those elements that can be addressed and those that cannot, share with all participants what the starting point is, obtain initial feedback on that starting point, detect new concerns in the participants and have the necessary elements to develop a protocol that truly serves the interests of the family.
It is important that all shareholders, present or future, participate in the elaboration of the family protocol. Leaving out of this scope any family member who will be a future shareholder may be a mistake because it is somehow limiting the scope of the protocol.
It is important to establish a clear process methodology at the outset. Otherwise, it may lead to a certain exhaustion and the feeling of not making progress. In this sense, and in the case that the assignment is made to a professional, it always seems advisable to start with the realization of a business and family due diligence, an initial meeting and individual interviews with the different members in order to obtain a complete x-ray of the company/family environment and to detect the opportunities and threats of the process. All this to end up presenting drafts of the protocol that will be submitted for study and evaluation by the participants and that in practice will usually give rise to other successive versions until the necessary consensus is reached.
In addition, it should be assessed whether or not, depending on the circumstances of each company and the business families involved, it is advisable to entrust the process to a specific professional who may already have a special prior relationship with some of the parties or a specific family branch. The important thing is to guarantee objectivity and independence throughout the process.
Finally, we must be able to find the right balance between the moral protocol and the legal protocol that must make up any family protocol. Both blocks are necessary.

In short, the process of drawing up a family protocol is not a simple task. Let us avoid mistakes and let ourselves be advised. We must be able to find the right moment to carry it out. It will always be better at a time close to the generational handover where both generations are able to contribute to the benefit of the company.

If you have any doubts about family protocols and their importance, family conflicts and the mechanisms to mitigate them, do not hesitate to contact our expert lawyers in Family Businesses, who will be able to help you in the particularities of your case.