Avoiding Family Conflicts and Resolving Them

When family arguments affect working relationships, the business may suffer.

• Have bespoke documents designed for your family business.
• Have those documents drafted and in place early in the business cycle. 
• Make the best use of your independent, trusted advisers.

We have all heard stories of family rifts being started by a joke in bad taste or something as innocuous as a game of Monopoly, such as when one person accuses another of stealing from the bank “as they’ve always done”. This spark ignites the kindling, the flames are fanned, and before long, a blazing row has broken out.

The result can be a fractured family, with members no longer on speaking terms and resentment continuing to grow the more the rift goes unresolved. Now imagine if the family members involved are also part of the family business. It can be difficult, if not impossible, to keep the family business separate from the personal lives of the family members. Suppose directors, shareholders or partners are not communicating correctly. In that case, the business will suffer, as decisions may not be made when they should be, arguments may break out in the office, and morale within the workplace may suffer severely. As hard as you may try to escape from it, a family fallout is almost inevitable at some point in the business cycle.

So what can you do to protect the family business? 

Ensure that you have bespoke vital documents such as shareholders’ agreements and partnership agreements. These can put in place structures, policies and procedures for you which can help to avoid and at the very least minimise the effect of a falling out, find a way to resolve a dispute and, as a last resort, remove disruptive individuals from the family business entirely but in a way that has been previously agreed.

This could have been avoided had structures and documents been put in place. There were none. For example, suppose Leonard had thought about the company’s growth before his son, Richard, entered the business and made provision for other family members to join the industry. In that case, he could have prepared a shareholders agreement providing a structure for the shareholders, controlling their interests and providing for certainty and succession on exit. This would have included provisions for valuation and the resolution of disputes. The resolution of conflicts could have been dealt with in several different ways but, most suitably here, by mediation or using an independent, trusted third party as a first step. This may have avoided the emotional and financial pain that all parties eventually suffered. Further, a well-drafted shareholders agreement would have provided for all pre-agreed exit policies.

Advancing the Business

Creating a clique with family members may brew resentment amongst non-family employees and senior management.

• Run the family business with conventional governance and management structures.
• Invest in non-family members.
• Appreciate that non-family members may represent and ultimately bring continuity to the business.

When you are in business with family members, you are working with people with whom you have a lifetime of shared experiences. This inevitably breeds a familiarity that is difficult to replicate with “outsiders”.

This familiarity can present itself in several ways within the family business. It can impact the way that people within the family business communicate with one another.

For example, decisions may be agreed upon informally between family members but not shared with the rest of the team. Family members may speak to one another in one way, but to other team members in another.

For example, decisions may be agreed upon informally between family members but not shared with the rest of the team. Family members may speak to one another in one way but to other group members in another.

Dare we even mention the dreaded word; nepotism?

The problem is that this can create a culture of “us and them” within the workplace. Resentment builds amongst the non-family employees, and before long, you have a staff retention problem or, worse, a potential mutiny on your hands.

There are many ways that a disciplined approach to team management can help to reduce the risk of or minimise the perception of family members being treated differently. However, this approach must be appropriately documented in policies and procedures. When explaining to a disappointed staff member why they have been passed over for a promotion, your life may be easier if you have previously circulated a written job specification.

Structure and forward-thinking are always necessary, even with a progressive and up-to-the-minute business. In this case, Mr and Mrs King should have made wills and entered into a shareholders agreement and employment contracts with their sons, Prince and Duke, considering their habits to regulate their wilder tendencies. Successful succession could have been achieved in a shareholders agreement compulsorily engaging a trusted third party’s advice and consent is required for major decisions or, in the extreme, the payment of cash from the business over a certain amount. Further, staff should have been trained, promoted and given an interest in the industry but not necessarily any control to invoke loyalty and continuity. This could easily have been achieved using government-approved or non-government-approved schemes. One wonders what, if any, the advice they took, and if so, did they keep to it?

Plan for your Success and your Succession from the Start

A failure to plan seriously for succession can lead to rising disillusionment amongst the next generation.

• Have a written exit and succession plan from the beginning.
• Share it with your proposed successors and include them in the governance and management of the business.
• Share and review your plan with your professional advisers.

Many people set up a family business because they hope to build a legacy that will remain within and provide for the family.

This is likely to be a long-term plan, with details that can only, and should only, be finalised once you have a good idea of the position that the family business will likely be in when the time comes to start the handover process.

However, losing sight of where you are heading can be straightforward. You should regularly review your plans with your professional advisers. The business is your baby, and whilst you may have good intentions of handing the reins over to the next generation until something is seriously thought through it is easy for a two-year plan to slip into a five-year plan and then into a ten-year program.

The result can be that decisions may not be in the best long-term interests of the business and can lead to would-be successors becoming increasingly disillusioned with the leadership.

If family members decide to no longer continue in the business or have not been sufficiently involved to have the skills to run the business, then your hopes of creating a legacy for your family may start to fall apart. Once again, the proper documents may help to save the day. The advantage of committing a plan to paper is that it provides a reference point for you and your intended successors. The program can be altered and fleshed out as time goes on, but if it is not documented and reviewed regularly with your independent advisers, you may find that you don’t get around to succession planning until it is too late. Once again, documents will save the day.

With proper planning, advice taken and received, and forward-thinking, and by bringing the third generation into earlier positions of responsibility, the situation could have been avoided, assets utilised, and the business continued in a different and refreshed form.

Start and Continue your Family Business with the Right Documentation

Without appropriate documents, your business may lack legal protection if disputes arise, whether those disputes are internal or external.

• Do not cut corners
• Make sure you have bespoke documentation for your business.
• Make provision for the future in such documentation.
• Keep the documentation under regular review as the law changes.

Growing a family business can be exciting, time-consuming, and challenging. Your focus is often on the demanding commercial aspects of the company and not on prioritising the essential legal start and Continuing your Family Business with the Right Documentation.

Without appropriate documents, your business may lack legal protection if disputes arise, whether those disputes are internal or external.

Ensure you have bespoke documentation for your business, such as partnership agreements, shareholder agreements or employment contracts.

You may think this may not matter when things are going well and everyone is getting on with each other. However, if disputes arise, failure to have proper bespoke documents in place may quickly lead to chaos and huge expense.

You may be spending considerable time and money in resolving a dispute; time and money are not paid to the business. Even worse may be the long-term impact such conflicts may have on morale within the family and workplace.

Many family businesses have been prematurely dissolved because the owners’ focus, drive and energy are absorbed by a bitter dispute.

Short-term off-the-shelf documents will not help you. These are likely to cause you more problems than solutions. They are the equivalent of trying to fit a square peg in a round hole. You want to ensure that your documents provide you and your business with maximum legal protection; you need documents drafted with provisions, procedures and policies specifically tailored to meet the particular needs of you, your family, and your business. You need to remember that every family and every business is different.