Not so happy families

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They say that you can choose your friends but not your family. But what happens if you choose to run a business with your family, is trouble then guaranteed or can a way through to commercial harmony be found? Adam Bernstein investigates

David Emanuel, chairman and a corporate law partner at VWV, thinks that every family business dispute will be different, but there are common themes, many of which are obvious. The most frequent tend to involve a lack of succession planning which leaves the next generation feeling frustrated, or uncertain about what comes next and which of the next generation should be involved; differences over strategic direction – a family owned lifestyle business or one that demands external management expertise at the expense of family members employed in the business; and different attitudes among or across generations on whether the business should stay in the family or be sold, and who decides.

But other issues can drive a wedge between family members, and some of them, reckons Philippa Dempster, Managing Partner of law firm Freeths, may be very trivial but can become significant. And money is often the root cause. She says “remuneration can often lead to a dispute if one family member feels that they are not being financially rewarded as well as another, or if they feel others are not pulling their weight in the business but being remunerated the same as those that are taking a key role in driving the business forward.” On top of this is what happens when one family member feels that they are not being included in decision making, however small that decision may be.

Problems do fester and can grow out of proportion. And it’s something that Emanuel has seen: “Over time failure to address issues can create tensions and unhappiness among the family, which can spill over into disputes which are not easy to resolve.” He’s seen first-hand that family businesses which put in place family charters or shareholder agreements have a framework to help work through issues. Those without any governance structures in place will, he says, struggle.


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Dealing with the issues

As any good lawyer knows, documentation is key. For Emanuel, this could include an obligation in a shareholder’s agreement with mediation as a mechanism for resolving disputes. The reason for this is simple: “it is less adversarial, keeps the dispute out of the public eye, and will generally be less costly than resorting to court action.”

And Dempster agrees, stating that alternative means of dispute resolution is always preferable “because litigation can be expensive and time consuming and is a distraction from the business.” Further, she adds that “if the key players in the business spend time on litigation the business will suffer as a result and the assets of the business start to dwindle as more and more money is spent on legal fees.”

This point is taken up by Emanuel; he suggests that if the family don’t want to bear the cost of mediation that an alternative “is an independent, respected, family-related figure – perhaps a trusted family lawyer or accountant, who may already be a non-executive director.” But as Emanuel explains, “the parties need to be in a frame of mind to mediate for this to have a chance of success. We have worked on family business disputes where mediation was being attempted at the same time as some protagonists were taking it upon themselves to shout at each other on their doorsteps late at night in earshot of their children. Needless to say, mediation was not successful.”

For Dempster, one prime benefit of mediation is that it will be felt outside of the business: “it serves to preserve the family relationships [precisely] because it is a less aggressive approach to resolving the dispute.”

But before embarking on mediation, she emphasises that it’s important for the parties to know what their legal position is and the strength of that position. “Sometimes,” she says, “individuals can have a skewed view or perspective of their own case, especially when emotions are involved, and this is not helpful for mediation because parties become entrenched in their position.” She believes that by knowing, for example, that a court may not agree with a party’s position from a legal perspective (that it is weak), they will go to mediation with an open mind.

Risk management

The fact that disputes happen is a given, but families can lower the risk of trouble through a family charter which sets out the fundamental principles on which members want to see their business run, and a shareholder’s agreement that offers detail on ownership and management rights and responsibilities. For Emanuel, these important governance documents can, he says, “help business and family relationships, and give confidence to face future challenges.”

Dempster sees similar value here too. She thinks a formal business plan should be written “so that the parties have some structure and each party is aware of the direction that is proposed for the business… Meetings should always be minuted to avoid misunderstandings down the line, with minutes circulated and if possible, an independent third party present.”

Both Dempster and Emanuel think that regular communication is critical. Emanuel advocates a “forum for family members to meet, away from home, to discuss family business issues in the context of their respective roles, whether as family member, employee, or shareholder.” Dempster recommends openness where “parties can…be open and transparent with one another by, for example, having regular meetings to discuss company finances, business initiatives, staff issues.”

It’s interesting that anecdotally at least, Emanuel says that those family businesses which have remained successful into the second generation and beyond say that the business comes first, however difficult that may be in personal terms. But from his perspective, problems don’t necessarily mean that a family member is cast out – “many longstanding family businesses find ways to involve the family through meetings and social occasions even where they may no longer have any association with the business beyond sharing the family name.”

It’s about people too

But what if there’s an irreconcilable disagreement? The solution – end game – will vary from family to family and depends on the priorities of each family member. As Dempster has witnessed, for some “family will always come first and for others money and success may be more important. We do see all too often families falling out over money and in those cases clearly the business is more important.”

But if agreement on business decisions cannot be reached then it is inevitable that one (or more) family members is going to have to exit the business or the business be wound up. Here, says Dempster, any member wishing to exit will no doubt require payment for their shares: “The business will need to be valued (the same as it would be in any other shareholder dispute) so that the leaving party can either be bought out by the remaining parties or the company buys back the shares at value.”

Of course, business isn’t necessarily about the current generation, it also concerns the future. Protection follows on from bringing in new family members at an early age to help them feel that the business is very much part of the family. However, as Emanuel notes, to work in a business long term they need to right skills for their roles.

Dempster thinks the same. Her advice is to get younger members of the family into the business to shadow older family members – she says that it’s “a great way for them to learn what is involved with, and what it takes, to successfully run the business.” But she warns that shadowing alone may not be appealing to the younger generation “so it might be useful to give them small tasks in the business, so they feel that they are contributing. As their confidence and competence grows, they can be given more responsibility.” And just as with the current generation, it is also important to reward hard work so that they feel their contributions are financially worthwhile.

In finishing, Emanuel notes that he has seen that “in larger, more established family businesses, the younger generation are often encouraged to find careers and build experience elsewhere, before bringing their external experience back to the family business.”

To conclude

So, while blood may be the strongest bond, it doesn’t guarantee success. The reality is that without a firm basis for good communications, an understanding how businesses are run, and ideally, good documentation, the seeds of destruction will be sown. But each to their own.