There are many advantages of going into business with family. Everyone involved will usually feel a greater sense of commitment and be heavily invested in making the company successful. Certainly, some of the world’s most profitable ventures started as family-owned businesses. Furthermore, you and your family will often have the same ethos and greater trust and loyalty towards each other, a vital competitive advantage that sets family businesses apart from other companies.
However, conflict can arise in any business, and a dispute in a family business can become much more personal and inflict greater damage to the business, as well as resulting in a family feud. So, it is important to be aware of the unique challenges facing family businesses, and for that reason, we set out some of the potential hurdles you may be faced with, as well as some advice on how to prevent and resolve such disputes.
Common Disputes that Occur in Family Businesses
There are many reasons why family businesses end up in dispute, but some of the main ones include the following:
Failure to Have a Succession Plan
Having a transparent succession plan in place is crucial. Succession planning is often tricky, involving awkward conversations and frequently causing disappointment. Therefore, it is easy to put it on the back burner and believe you have enough time to tackle it in the future.
However, the person with overall control of the business may pass away or need to step down suddenly, and without a succession plan, there is a real risk that there will be disagreements when it comes to deciding who will take over the company. This can create considerable tension and jeopardise the future of the business.
Failure to Formalise Matters in a Shareholders’ Agreement
The nature of a family business is that things are often done informally, and there is no documentation stating how members should work together and resolve disputes. This can result in an impasse and, in a worst-case scenario, a deadlock that can only be resolved by winding up the company.
For this reason, it is essential to have a comprehensive shareholders’ agreement in place to ensure the effective running of the company by defining members’ roles, responsibilities and the extent of their ownership.
Participation and Input
Clearly defined roles and boundaries are important to the smooth running of any business, but particularly so in family-run businesses. Bad feelings can be created where it is perceived that one member isn’t pulling their weight compared to others despite receiving the same income or shares of profit from the business.
Similarly, an issue may arise if a member feels they do not have the same participation rights as the other members. Such matters need to be resolved before they escalate into a longstanding problem.
Fund Allocation, Including Dividends and Salaries
Another common cause of resentment within a family business is how funds are allocated. Family members who are just shareholders and not directors may feel concerned about the level of salary that the company directors are paying themselves. They may believe that the money should be paid out as dividends instead.
Rivalry or Personal Disagreement
Rivalry within the family business, for example, between siblings or father and son conflicts, can cause serious problems and ruin the business’s everyday operations. Personality differences and unresolved conflict within the family can also spill over into the business environment.
Family Member Setting Up A Competing Business
Tensions can arise when a family member who was previously part of the business sets up a company that is in direct competition with the existing one, putting stress on the remaining members of the family business.
How a Dispute Can Impact Your Family Business
If not properly addressed, conflict can significantly impact the continuity and success of any business, leading to a lack of trust and communication between members. But where it is family at the centre of the conflict, the implications can be more severe and strife harder to resolve. A family business dispute can have many negative effects on company performance, including the following:
- lower productivity
- a loss of important employees and customers
- a threat to business continuity
- a risk to long-term sustainability
- potential for business failure
Given that a family dispute can prove disastrous for your business, it is advisable to address it promptly and effectively. Encourage everyone to communicate openly and honestly and try to understand the root cause of the conflict so that you can tackle that rather than just the symptoms.
Lastly, if you are having trouble resolving a conflict on your own, consider seeking professional advice as soon as possible to reduce the negative impact as far as possible.
Preventing a Family Dispute
While there is no surefire way to avoid conflict within your family business, there are certainly ways in which you can reduce the risk of a dispute arising.
Ensuring you have well-drafted, thorough documentation such as a shareholders’ agreement and Articles of Association in place often allows matters to be settled early. They should set out how decisions are made, regulate management and ownership arrangements and spell out the shareholders’ and directors’ obligations while working as part of the company.
Family business members often don’t put appropriate protections in place, such as shareholders’ agreements, taking the view that such agreements are an unnecessary cost. However, a family business dispute is no different legally from any other business dispute and is likely to be more emotive as family dynamics are concerned. For this reason, shareholders’ agreements are key in preventing disputes of this nature from getting out of hand.
If your business runs as a partnership, you should ensure that a partnership agreement is prepared, covering the important issues of how the individuals will work together and how profits will be shared. It should also include provisions on what happens in partner expulsion and retirement cases.
In addition, everyone’s roles and responsibilities in the business should be explicitly defined to reduce the risk of misunderstanding and dispute. This can be done through a director’s service agreement or an employment contract.
Members of a family business need to be on the same page. To achieve this, you could have a family charter drawn up. While not legally binding, it can be a useful roadmap that sets out what the longer-term future of the business will be, as well as issues such as succession. It can also be used to reconcile matters when disagreements occur.
Where these measures are not enough to avoid a dispute, seeking immediate legal advice and support is vital to prevent a minor disagreement from developing into a major conflict.
What Can I Do To Resolve a Family Dispute?
Sadly, sometimes, family disputes do occur despite having the most robust documentation in place. In such situations, there are options for you to consider, and we can help you decide on the best way forward to suit your needs.
Alternative Dispute Resolution (ADR)
Alternative dispute resolution (ADR) is a good option to resolve conflict within a family business because it is a relatively quick way to resolve the problem in a mutually acceptable way. It can preserve the parties’ business and personal relationships - something that is often not possible when litigation is involved - and is more cost-effective than court action. Sometimes, setting time for open and honest conversations between the parties in such scenarios can help them express their positions and consider how the issues might be resolved.
Mediation
Mediation is a process through which parties look to work out their issues with the assistance of an independent third party. The goal of the mediator is to encourage the parties in dispute to settle, and mediation is widely used in business disputes, with excellent results. Again, this is more cost-effective than court action and having someone impartial overseeing the disagreement often helps to reach an agreed settlement between the parties.
Litigation
If an agreement can simply not be achieved, litigation remains an option. This is usually viewed as a last resort measure, given that it can be impossible to rebuild relationships once the parties have embarked on litigation. It is also the most expensive and time-consuming method of settling a dispute, and the courts will generally expect the parties to have made all reasonable attempts to resolve the matter before resorting to litigation.
However, the litigation process will force parties to disclose all documentation that will have a bearing on the issues, something that is not always achievable through other methods. Furthermore, it will deliver a clear outcome that cannot be disputed.
Next Steps?
Going into business with your family can be personally and financially rewarding. However, you should be mindful that family business involves unique challenges, which can have disastrous consequences on business and family relationships if not addressed from the beginning. For this reason, you should take proactive steps to formalise how the company will be run, everyone’s roles and responsibilities, and the process that needs to be undertaken to resolve disputes and disagreements. This will minimise the risk of future conflict and will protect your business and the good relationship you have with your family.
If you don’t have clear rules and regulations concerning your family business in place, it is never too late to act. Our expert Dispute Resolution team specialises in family business matters and is experienced in drafting comprehensive shareholders’ agreements and articles of association that are tailored to your business. We can also be on hand to help you navigate complex family dynamics and resolve any business disputes as quickly and effectively as possible. For more advice on any issues you might be facing in relation to family-run business, contact us today on 0300 303 2071 or email us.
