How to Deal with Common Disputes Involving Family Owned Businesses

In a family-owned business, your business partners and coworkers are the same people with whom you also share family ties. If things have not gone well, there is no escaping the work colleagues at the end of the work day. Similarly, if there are family tensions outside the workplace, they will affect the work environment as well.

As a result, disputes can get a lot more heated than in a standard business, with high potential for emotional spillover. At their worst, family disputes can tear apart a business. Yet when you and your family work well together, being part of a family-owned business is one of the best feelings in the world. Help keep it that way by anticipating disputes before they happen and taking these basic precautions.

Common causes for family business disputes

= Changes in family status =

The operations and ownership of a family-owned business can be directly affected by inheritance, power of attorney, divorce, or estrangement. Changes in family status sometimes alter the decision-making power of the partners or executive members. A split between a husband and wife who are also business partners may force the business to dissolve if an alternate solution cannot be found.

= Emotional baggage =

Business conflicts are often driven by emotion when working with family. There may be years of background family issues behind every business decision. Any changes in family status can also make matters much worse if things also get emotional, especially if other members of the family take sides.

= Unclear expectations =

Some relatives may expect to be hired into a family business. The person in charge may also expect to employ them, regardless of their capabilities or personal desires, because they are family. Promotions may be given beyond a relative’s ability, or they may be withheld despite a relative’s ability.

Unclear expectations are especially common between parents and grown or nearly-grown children. Some parents assign their children roles in the family business based on age or gender, without regard to ability or inclination. Some children may want to work their way up through the family business, while others may expect to have things handed to them on a silver platter.  Some growing children may be ready for more responsibility than the parent is willing to cede. Parents may also automatically expect that their children will take over the family business someday, without consulting the child.

Preempting family business disputes

= Written documents =

Clear documentation of the terms of business and the roles of each family member involved in the business is the most important way of avoiding family business disputes in the first place. All documents should be notarized, dated, and signed by all the people involved when the business first starts up. If there are subsequent changes in family status which affect the business relationship, this should be recorded in updated documents.

Business documentation should include ownership, clear job descriptions, and the chain of command. All responsibilities, duties, and benefits should be clearly written out for every staff member and decision-maker, whether they are family or not.

Family documentation, such as power of attorney, should also take business responsibilities into account. Wills, trusts, waivers, and powers of attorney are critical family documents for all decision-making family members.

If a husband and wife establish a business together, the business documents should include clear business arrangements in case the marriage ends. If a husband and wife marry after they have established a business together, the business documents may have to be updated, and the marriage documents should include a prenuptial agreement which determines how the business will be divided if the marriage ends. These documents may also need to include the business status of any children who have an ownership interest in the business, especially if there are also children from a previous marriage.

= Plan together before committing others =

Those entrusted to be future trustees, executors, or with the power of attorney should be made aware of and agree to their responsibilities before those responsibilities are formalized. Do not commit adult children to a course of action in the family business without discussing it with them first.

= Waivers =

In cases where some family members are involved in the family business and others are not, a signed waiver may be useful. This waiver states that those relations who are not involved with the family business will not interfere with the business. That way, future changes in family status will not affect existing business operations beyond what has been previously agreed to and documented.

For example, a divorced wife who has never previously been involved with the business may attempt to claim partial ownership or control of the family business after the divorce. This kind of thing can throw chains of command into confusion. However, if she has previously signed a waiver, any attempts to interfere will have no legal basis beyond what has been notarized in the business documents themselves.

= Day-to-day business communication =

For standard business operations, regular staff and management meetings are even more important for family businesses than usual. These keep everyone in the loop, so there should be no unwelcome surprises.

= Performance issues =

Performance issues are best dealt with through regular performance evaluations. These should be given to every employee of the business equally, regardless of whether the employee is a relation or not.

Sometimes developing issues with poor performance can be abated by placing a person who is not a family member in charge of hires and performance evaluations. A standard trial period may also help prevent future employment issues.

Minimizing family business disputes

= Delay business decisions during emotional times =

Most events which result in changes to family status will be emotional. Weddings bring positive emotions. Divorces and estrangements bring negative emotions. Deaths can bring a family together or tear it apart.

It is difficult to think rationally when in the grip of powerful emotion. Even the most positive emotions may result in business decisions which are taken more with the heart than with the head. It may be wise to delay making any major business decision, especially those dealing with family, during such times.

= Avoid taking sides =

If the family business consists of just 2 or 3 related people, any dispute is likely to involve all of them. However, if the family business is any larger, disputes can spread quickly along family lines, even to people who are not directly involved.

The best way to keep family business disputes in check is to keep them isolated only to those who are directly involved. The business decision-makers should stay out of any disputes which are not directly business-related, and should never take sides in any case.

If all else fails

If the dispute is business-related, cannot be isolated, and cannot be resolved through normal conflict resolution channels, the business decision-makers will have to step in. Whenever possible, their decision should be based solely on the existing written documentation. This approach minimizes the extra emotional baggage that family relations can bring into a business dispute.

Litigation in family business disputes should be avoided if at all possible. Third-party mediation may be useful in resolving the dispute.

If the dispute is not directly business-related but is starting to affect business, those involved should be asked to take a leave of absence from the business until it is resolved. They may be allowed to use standard vacation or personal days, as appropriate, to cover the absence. However, they should be given no special considerations beyond what their job description allows.