How can you avoid family business disputes?
Dealing with family or friends in business can be incredibly rewarding. Families are rightly proud of the businesses that they have set up and been passed down the generations. It is hugely satisfying for those working in their family businesses to know that they are providing not only for their family members – but potentially for many generations to come.
However, whilst working with your family members can be a blessing, knowing those you work with so well, and over so many years, possibly being very similar to them, can also, sadly, sometimes be a curse.
What challenges arise in running a family business?
We often hear the phrase that the first generation makes it, the second generation spends it and the third generation blows it. People have a very different work ethic and ambition if they have not had a privileged background and it's difficult for wealthy families to motivate their children to study and have ambition. Bringing up children in privileged backgrounds and hoping that they will go on to work in the family business whilst ensuring that they don't have a sense of entitlement is a real issue.
How can families balance dynamics and business needs?
I think the first and most important objective is to set clear roles and expectations.
- All the children/cousins going into the family business?
- Is there an obvious successor?
- Are there clear expectations as to what qualifications people need in order to come and work in the business?
By definition there is always hierarchy in families, both in terms of generations and "sides" of families when you get to the next generations. If divisions start to appear, confront them rather than let them fester.
Make it very clear what is expected. Discuss what the vision of the future is going to be and what it might look like. Listen to queries and concerns by engaging with the next generations and what they are saying. It may be that they are overruled but it is important that they are heard and value is given to their opinions and contributions.
It might sound obvious, but family businesses often struggle with favouritism. If possible, try to avoid unequal treatment or if there is one clear choice for the next CEO/leader of the business, speak to all family members about why their characteristics make them suitable.
Should expectations be documented?
Whilst family businesses are often less formal that non-family run businesses, that is often what causes issues. If you can have formal legally binding documents then you should, such as partnership agreements, shareholder agreements, employment contracts. Quite often the process is incredibly helpful. Set out in writing what the expectations are, what they are expected to sign up to and what the vision of the future is going to be. As the documentation is drafted and finalised, issues and concerns should be raised, discussed and decided upon as a family.
Make sure documentation sets out decision making processes – and processes for dealing with disagreements. Clarify how major decisions are made, for example, whether by unanimous vote, majority or seniority. Set out how disagreements will be mediated in private. It is the drafting of and agreeing to these documents that is most likely avoid disagreements in the first place.
In addition to documentation, what else is helpful?
Communication protocols for all members of the family, even those who might not be part of the day to day running or engaged in the business. Make sure you have regular board meetings, which are planned with agendas and properly documented in the form of minutes that are circulated for comment. Do it formally (ie not at a family dinner) or if that is the only time you are together, carve out time before the meal which is precisely for that discussion.
In addition to communication, make sure that you plan early for succession. Not knowing what a business is going to look like going forward is unsettling and de motivating. Be transparent about who will take over and how transitions will happen. Don't make it into a competition or pit family members against each other. It is crucial to avoid assumptions so put everything in writing following discussions with all the stakeholders.
All this is based around family members – what about bringing in expertise?
Whilst this can sometimes be viewed with scepticism – or the desire to 'keep it in the family' – strategic use of exceptional advisors can be incredibly valuable. Many family businesses have long term advisors who are de facto family members. Their role assists with bringing objectivity into decision making and often introduces specialist skills that current family members do not have. Choose your advisors wisely and invest in them for long term commitment.
What should you do when issues begin to emerge?
Even the most well structured family businesses and the most cohesive family units can have issues. Families are constantly evolving – people age, move from childhood to being adults with opinions. People marry and people die, which can cause a real sense of loss and a rebalancing of family dynamics.
A few short pointers for when things go wrong:
- Address issues early.
- Don't let resentment build up. Talk about concerns ASAP.
- Use facts, not emotions, and keep the conversation focused on business.
- Think about bringing in a mediator. A neutral third party (mediator or business advisor) can facilitate difficult conversations and is the best way to avoid full blown legal disputes.
If working together is no longer viable, look at options like buying someone out or restructuring ownership. Many family business disputes end up destroying both the business and family relations. Don't let that happen. Be realistic about restructuring or being bought out and think practically rather than emotionally.
When is legal action necessary?
Legal action should be a last resort. Our litigators spend a lot of time trying to help clients avoid litigation. If it is unavoidable – choose lawyers with experience in family business disputes. Family business disputes are different to standard commercial litigation – the lawyers need emotional intelligence, an understanding of family dynamics and a sense of empathy.
Learn from experiences and use them to create better systems and safeguards for the future,to protect the most precious things – your family business and your family.