HR & Management

How to handle family business disagreements

5 min read

16 October 2018

Business disputes can be difficult at the best of times. However, in family businesses, it's even worse.

In family businesses, even the most innocuous disagreements can become personal and escalate to greater proportions. So how can family business owners, managers and stakeholders attempt to come to an understanding and, should the damage be irreparable, agree upon exit or succession plans?

Disputes can come out of any number of scenarios, borne mostly out of a failure to communicate. Many arise because of differing views within the family over what is right for the future of the business. Examples include generational disputes, such as grandparents arguing with their children over their grandchildren’s involvement in the business, sibling rivalry regarding succession and issues relating to money.

One way to avoid these breakdowns in the first place is to – where possible – have healthy and structured discussions, and perhaps even have contracts drawn up ahead of time.

These could be more informal documents such as a family business constitution, setting out aims and aspirations for the business, or they could be legally binding shareholder agreements and bespoke articles of association.

Compromises may need to be made, but it is always better that these are agreed ahead of any potential conflicts, so as to give all parties time to come to terms with the resolutions made.

If a breakdown does occur, the first port of call is of course reconciliation, whether this be through meaningful discussion or a more structured mediation process. It might be worth employing the services of a third party from outside the family in a non-executive director role, as they could help to broker reparative conversations between feuding parties, given their own lack of emotional involvement.

If there is no possibility of reconciliation, and there aren’t any contracts or agreements in place, then there are still a number of different routes which owners can go down in order to devise exit or succession plans.

For instance, the business could be split between family members. This won’t be possible for all organisations, and it can be difficult to translate one individual business into two separate, viable companies.

Therefore, the best course of action might be for one party to buy the other out. Deciding which party is best placed to buy the other out would depend on their daily engagement with the business and their skill set, if one party is really just a shareholder, observing the business but not actually getting involved with running it on a daily basis, then they would likely be best suited to sell their shares.

If the family instead chooses to sell the business entirely, this could be done as a trade sale or by attracting interest from a private equity firm. In these instances, stakeholders within the family will need to position themselves accordingly by seeking both legal advice around preparing the business for sale and advice from accountants on getting a valuation.

The advantage of this strategy is that a market price can be established. This means that while preparations from a trade sale may not always lead to one, they could instead lead to further talks regarding a split of assets within the family with a market value for the business firmly established.

If the owners feel a need to protect the business, yet do not see a clear successor or a sensible way to split the business, then it could be possible for a third-party employee or team to be brought in, as part of a management buy-in.

If the family can identify someone they know and trust, perhaps an ex-employee who is interested, then this may mean that they can simply become shareholders, still receiving income and with some ability to shape the direction of the business, but also assured in the knowledge that it is in safe hands.

When it all breaks down for a family business there is more than enough upheaval, emotional and otherwise, without further arguments over succession and exit strategies rearing their head.

This will be made decidedly easier if prior agreements are put in place following meaningful discussions, but even without them it is always worth engaging in open communication, bringing in third parties to help, and finding a solution which avoids unnecessary litigation.

Mark Thompson is a corporate partner at law firm, Shakespeare Martineau.