Adam Bernstein investigates running a business with relatives
David Emanuel, chairman and a corporate law partner at VWV, thinks that every family business dispute is different, however, there are common themes. The most frequent tend to involve a lack of succession planning, which leaves the next generation feeling frustrated, or uncertain about what comes next.
But other issues can drive a wedge between family members, and some of them, reckons Philippa Dempster, managing partner at law firm Freeths, may be very trivial but can become significant. These issues can include money and decision making.
Philippa 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 are remunerated the same as those that are taking a key role in driving the business forward.”
As any good lawyer knows, documentation is key. For Emanuel, this could include an obligation in a shareholder’s agreements with dedication as a mechanism for resolving disputes. Dempster agrees, stating that alternative means of dispute resolution are always preferable, “because litigation can be expensive, time-consuming and distractive.”
This point is taken up by Emanuel; he suggests that if the family doesn’t want to bear the cost of mediation, that an alternative “is an independent, respected, family-related figure.” However, as Emanuel explains, “the parties need to be in a frame of mind to meditate for this to have a chance of success.”
Before embarking on mediation, Dempster emphasises that it’s important for the parties to know what their legal position is. She believes that by knowing, for example, “that a court may not agree with a party’s position from a legal perspective they will go to mediation from an open mind.”
The fact that disputes happen is a given, but families can lower the risk of trouble through a 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, management rights and responsibilities.
For Emanuel, these important governance documents can, “help business and family relationships, while giving them the 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 and if possible, with a 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.” Dempster also recommends openness where “parties can be open and transparent with one another by having regular meetings to discuss the company’s finances, business initiatives and staff issues.”
But what if there’s an irreconcilable disagreement? The 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.”
But if agreement on business decisions cannot be reached, then it is inevitable that family members may have to exit the business or it will be wound up. Here, says Dempster, “the business will need to be valued 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. Bringing in new family members at an early age can help them feel that the business is very much part of the family. However, as Emanuel notes, to work in a business long term, the family members need the right skills for their role.
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.” However, 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.”
So, while blood may be the strongest bond, it doesn’t guarantee success. The reality is that without a firm basis for good communication, an understanding of how businesses are run, and ideally, good documentation, the seeds of destruction will be sown.
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