When Informal Agreements Stop Working
Most second-generation firms still run on verbal understandings. Here is when that becomes a liability and what to document first.
When a family business employs fewer than twenty people, informal arrangements often work well. The founder approves spending. A sibling handles sales. A cousin manages the warehouse. Everyone knows their role because they have worked together for years.
Problems tend to appear when the firm crosses two thresholds: roughly fifty employees, and the involvement of a second generation in management or ownership. At that point, decisions that once required a hallway conversation now affect departments the founder barely visits. New hires do not share the family’s unspoken rules. A cousin who joined five years ago may expect the same voice in strategy as a sibling who built the production line.
Signs that informal governance is strained
- The same disagreement resurfaces every budget cycle without resolution
- Non-family managers ask for written policies the family has never created
- A younger family member makes a decision that an older relative reverses without explanation
- Dividend discussions become personal rather than financial
- Key staff cite uncertainty about who they report to
None of these require a crisis to address. They are signals that the firm’s structures have not kept pace with its size.
What to document first
We recommend starting with three documents, even if they begin as simple drafts reviewed by your accountant and counsel:
- Decision authority matrix — Who can approve spending, hiring, contracts, and strategic changes at what thresholds
- Dividend or distribution policy — How profits are shared among branches, and what is retained for reinvestment
- Board or family council terms — Who meets, how often, what they decide, and how disagreements are resolved
These do not need to be perfect. They need to exist so the family can discuss them, revise them, and refer to them when tension rises.
The role of a governance review
A structured review does not replace legal advice. It maps how decisions actually flow today, identifies where informal practice diverges from written agreements, and recommends changes the family can adopt on its own timeline. The goal is a shared picture of how the firm runs — one that every generation can see and discuss.
If your firm is approaching one of the thresholds above, an initial conversation costs nothing and may clarify whether a formal review is warranted.