Preventing ownership disputes in family businesses

This article comes from the Guardian Small business network.  We would add 'come and see us' to the solutions, yet the rest is straightforward good advice.  As always, following good advice is never so easy, nor are the situations so clear cut, so read on with a pinch of salt....and then think of us to help you handle the emotive stuff that is part and parcel of any family situation.

Key causes

What are the key causes of serious disagreements between family business owners?pink heart with marriage text
A divorce in the family can create a difficult working environment for some SMEs.
Photograph: Phil Degginger / Alamy/Alamy

According to the Institute of Family Business, there are more than three million family businesses in Britain. They provide about 9.2m jobs (40% of total private sector employment), "contribute almost a quarter of total UK GDP [about £346bn] and provide more than £81bn in tax to the UK Exchequer."

Most family businesses are faced with the same challenges that other businesses face, yet the more personal relationships that exist within family business create different considerations – especially when things go wrong.

Family matters

"Serious problems relating to family business ownership tend to be less common when the firm is first-generation owned and managed," explains Jeremy Shulman, founder and senior partner at Leeds-based solicitors Shulmans LLP. "Problems often arise when second-generation family members enter the business or when ownership needs to be transferred."

Problems are often a result of personalities, Shulman says. "Family and non-family members might not like it when, for example, an owner brings in their son or daughter as the first step to one day taking over the business.

"The son or daughter might just not have what it takes and if they are contributing less yet taking home more pay, that can easily give rise to jealousy and resentment among other members of the team. Wise parents who own family businesses realise when their sons or daughters don't have what it takes. They encourage them to pursue their careers elsewhere – which can prevent an awful lot of grief later on."

In other cases, widely varying wage packets among members can cause malcontent in dysfunctional family business, says Shulman, while in other cases having to continually concede power to more senior family members can leave others feeling disgruntled.

Personal issues

Shulman says another common scenario is where personal relations sour in the home, which can have enormous implications for family businesses. "Many UK firms are husband-and-wife-owned. Married couples start the business together and some become highly successful. Yet marriages, like businesses, can run into serious difficulties. Sometimes it leads to divorce between two people who no longer want to work together, which creates a serious issue, of course.

"In other situations, a parent and their son or daughter could fall out, or brothers or sisters, these things happen in families. When personal relationships become bitter, working together can become impossible. If you co-own a family business, you shouldn't totally rule out the possibility that you won't ever be faced with serious ownership problems – they happen."

Often tensions "bubble away under the surface" says Shulman. "Then one day something snaps and in the worst cases there is serious a falling out. That can divide family-owned businesses and leave them in turmoil."

Conciliation and mediation

When family members who own high-value businesses go to war with each other it can lead to lengthy, expensive legal action. "Those involved usually fall out and ending up never speaking to each other again," says Shulman. Most of these disputes are resolved financially and don't end up in court.

In some other cases, Shulman says, family members can use conciliation or mediation services to resolve more serious disputes. "Sometimes involving others enables problems to be talked through without tempers getting frayed. As a result resolution might be reached more swiftly and amicably."

Any disagreements over how the business is being managed or the direction in which it is heading are normally sorted out at board meetings, says Shulman. "Such things aren't confined to family businesses, of course, but when such issues are being discussed personal relationships mustn't be allowed to come into it."

Preventative measures

Shulman believes the best way to avoid ownership-related conflict in family business is to seek legal advice "at the beginning and at appropriate stages of its development". If there is clear agreement, says Shulman, set out in a signed legal document, uncertainty is removed. "Disagreement often arises out of lack of clarity. If clear lines are drawn, those who try to ignore them are left in a weak position. It's hard to argue when key facts are set out in black and white."

If you haven't taken such steps during the formation of your business, Shulman says it's never too late to get the necessary legal infrastructure in place. "If it's a company, obviously you'll have your memorandum and articles of association, but that doesn't cover all the bases.

"You can have a shareholders' agreement, which is a more personal document drafted specially for the parties. You could also have service contracts for each family member, detailing roles and responsibilities, which can prevent problems.

"You could also have a family charter drawn up. These aren't legally binding, they're more of a roadmap that regulates leaders within the family and sets out where the longer-term future of the business, in terms of management, ownership and succession. All family members can contribute. A family charter can be used to reconcile matters when family members disagree."

Succession planning

Succession is a major consideration for family businesses, and something where reliable legal advice can remove the risk of conflict. "When you first meet potential clients who are family business owners, very quickly you get an idea whether there are any serious succession issues that need to be addressed," says Shulman.

"When you ask about succession, you'd be surprised at how many owners haven't given it a moment's thought. Often they're caught up in running the business or think they don't have focus on it yet – while some struggle with the very idea of letting go of the reins. But in family businesses it's often easier to plan succession, because ownership stays within the family."

What final key pieces of legal advice does Shulman offer to family members running their own businesses? "Dig out any legal documentation you have that relates to ownership of your business. Try to understand its implications and consider whether it works for you as it is. Even if you think it does, what about the future – could circumstances change? Consider different scenarios – is the documentation still adequate? If you have any concerns, seek professional legal advice. You can't leave anything to chance – one day you might really regret it."



Jeremy Schulman's advice is biased to the back stop being legal advice and legal contracts - after all he's a lawyer.  There's a step in between - go read It takes Two to Tango highlighted earlier in this news section.  And then come back and talk to us.

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