Ownership disputes between partners in business are bad enough. If you add in the complex emotional relationships of family members, the disputes can get downright ugly.
Family-owned businesses represent the majority of all businesses in the US and employ around 50% of the workforce in this country. The nation’s gross domestic product relies heavily on family-owned and run companies. It is safe to say that the health of the family business predicts the financial welfare of the United States.
When a family business faces problems, there are added variables and dynamics you do not find in companies run by non-related partners. It is hard to leave work at home when work is home, and it is hard to leave family disputes at home when the family is at work with you.
You will find that there are a few common sources of conflicts in these types of businesses. Proper planning can go a long way towards avoiding expensive legal battles when disputes occur.
COMMON SOURCES OF CONFLICT IN FAMILY-OWNED BUSINESSES
Family relationships are deeper than any other and issues tend to be more fraught with tension because it feels more personal. Depending on how these relationships are handled, the interests of the business can be served by them or undermined.
Sometimes problems are due to past grievances. Other times problems occur when family members are hired into the business regardless of their abilities, talent, or willingness to work there.
PROBLEM OF ROLE SEPARATION AND OVERLAP
Role separation is the main issue behind conflict in these cases. Unless all parties work at defining different roles for themselves while at work, the role they play in the family becomes the default.
The business and the family is already tightly intertwined. If private squabbles play out at work, the business suffers. Business and family values may have some overlap but not align completely. The expectation that family takes priority over the goal of maximizing economic returns for the business is often the fuse that sets off the powder keg.
Succession planning is critical for the survival of a family business; each generation must pass the reigns onto the next. Unfortunately, many family-owned companies fail to plan for succession.
Part of the problem is that nobody wants to think about the death of family members and part is that some family members do not look forward to letting go of power. Succession planning is left until death or incapacitation occurs and then it feels too late to develop an orderly process to follow.
Issues can also occur when parents are avoiding the need to determine how to treat multiple children fairly or how to transfer control to the most capable member without causing a family rift. It is not unusual for family members to wind up on opposite sides in court.
In businesses co-owned by spouses, divorce can have a significant impact on its viability. Different areas of law govern business and divorce. Dealing with dissolving a marriage and a business at the same time can create logistical problems.
The rights of each party are not identical in each context and divorce law takes precedence. You may want to keep the company but divorce law can require it to be divided equally between you and your ex-spouse.
Inheritance and trust law supersede business law as well. If you do not agree with your family members about who should be the boss and how the business is run, the family could devolve into factions that fight the issue in court. Parental wills and related instruments can also create an environment in which the siblings go to court to break the will.
Other relationship problems stem from:
● Sibling rivalry
● Disputes over compensation
● Financial participation without working in the business
● Third and fourth generation growth
When lines of responsibility and authority are not documented, the business becomes unstable. In fact, the lack of documentation regarding the basic understanding of the business among the co-owners is often at the heart of the problems.
Planning ahead can accomplish the goals of keeping the business alive and economically successful, preserving family unity, and reduce problems in the future. The best practice you can take is to acknowledge that a family-owned business is not like other businesses. You are dealing with complex relationships as part of your business planning.
- First, ask yourself how important the family relationship is. If it is not that important because the family relationship is not close (for example, cousins who did not grow up together or prior generation owners are deceased), it may not matter as much as a closer bond.
- When the relationship is important, you must establish a dispute resolution process that helps you balance business and family interests. Everyone must be on the same page and understand that an ultimate resolution may be a compromise in which nobody gets everything they want.
- An advisory board formed of non-family members may be better suited to dealing with business problems. Each family member nominates an unrelated individual to speak for them. It is also handy to have a business adviser involved on an ongoing basis who can mediate during disagreements.
PREVENTIVE LEGAL MEASURES
The best preventative for legal problems is to involve an experienced attorney from the beginning and at each stage of business development. However, it is never too late to contact a business lawyer to help you put legal structures in place to manage succession, define lines of authority, and resolve disputes.
A knowledgeable family business attorney can develop a family charter, which is not legally binding but can act as a guide to regulate leaders within the family and set out long-term goals and plans for future ownership and management. Service contracts detailing the roles and responsibilities of each member serve as legal documents to enforce and protect workers, family or not.
In an ideal world, you and your parents, siblings, spouse, or children would all want the same destination for your company and never argue about how to get there. For the real world, planning and the seeking the assistance of a business law firm can keep your business going in the right direction, even after you are gone.