Resolving Family Business Disputes

By: Margo Keller | Mediator, Arbitrator

kellerI do love to buy from a family business. I especially enjoy the immediacy of knowing the person who picked my carrots at the organic farm, stomped my grapes at the winery, or smoked the salmon that I’ll place on the table. I value the local banker who handles my business and the neighborhood restaurateur who knows just what I like to order. I believe in “the family business ethic,” like watching a father and daughter operate their law firm together, learning from each other along the way. All of this just confirms many core social and economic values. But, in my experience, a family-run business must develop strong conflict resolution skills to remain viable through the generations and continue on the path of success.

Some family businesses are great role models for healthy communication and positive conflict resolution. Others suffer from unique barriers to reaching agreement, often issues which actually originate in the familial relationship.

CLASSIC CONFLICTS

Consider the following cases:

  • A father brings only one of his four adult children into his fish processing business. He is considering gifting smaller percentages of the company to the other children over time but he has not discussed this with any of the other three. The working sibling resents the others getting shares of a company “for free,” while the others wonder why they have been excluded.
  • Siblings start up a restaurant with one putting up the capital and the other contributing non-quantified “sweat equity.” The sister who put in the money resents her brother’s blanket assertion that his work equals what she put in. (Of course, the IRS has an even stronger view.)
  • Two brothers have been buying houses, fixing them up, and selling them without any agreement for division of profits. Now that the older brother has married, he wants a monthly salary, while the other wants to keep living with their parents for “free” in order to hold all earnings for the next house purchase.
  • Five cousins inherit the family winery in equal shares; however, two of the five have been working in the business for years. Everyone has a different view of how the business should be run now that the founders have passed. (For starters, they all want to be the boss!)

COMMUNICATE: WHAT’S OUR DEAL?

How many of us are assertive in a general business setting but cannot confront our father or older sibling? Sometimes it is very difficult for members to overcome the family dynamic to communicate messages of change, approval or dissatisfaction. Family members can transport notions of fairness or patriarchy from the kitchen table to the board room without considering factors such as merit, aptitude, work ethic or profitability.

The time for tough talk is never as good as when the deal and the parties are just coming together. Discuss and hash out: who is contributing what, who makes what decisions, what happens if more capital is needed, when and how profits will be distributed, and what buy-sell provisions will be implemented if one party wants out. Communicate and then put those agreements in writing. No written agreement should be postponed under the theory of: “we are family and we trust each other”. Trust deepens after good communication and the execution of a good written agreement.

NEGOTIATE: WHAT ARE OUR INTERESTS?

When differences arise, focus on interests rather than positions. Your position is what you have decided on: “I want a controlling percentage in this LLC”. Your interest is what motivates you-what lies behind your position: “I need to make sure no one can fire me until I retire”. Once the interest is understood, the other member may be able to address the interest and agree to a long-term employment agreement which can only be terminated in the event of gross misconduct, or perhaps, the parties can require unanimous or supermajority votes in certain areas to protect the non-controlling members.

In almost all cases of family business conflict there is an overriding interest in preserving the family relationship. If parties learn to negotiate based on interests rather than positions and agree to place this shared interest as paramount to any negotiation, they will have a greater chance of success. Advisers to family businesses should recognize and respect this shared interest and acknowledge that sometimes, protection of the ongoing relationship is far more important than the particular conflict. Without this recognition, Thanksgiving dinner can become a pretty tense affair.

MEDIATE: WORK BEYOND A WIN-LOSE PARADIGM AND DEVELOP CREATIVE OPTIONS FOR SETTLEMENT

When family members take their dispute to trial, someone is generally regarded as the “winner” and the “loser(s)” may be forever alienated. Not only is there a resulting alienation from the business but more importantly, disputing family members can become permanently estranged from the larger family.

Mediation can provide an opportunity to be creative and develop solutions well beyond what a court could do if the parties went to trial. Maybe the parties can craft tax-advantaged results, agree on payment plans for a buy-out, or at least stipulate to appraisers and a process for resolution. Consider mediating a dispute before a lawsuit has been filed, before the tension from a deposition has hardened hearts (and spouses), and before the pie has been reduced by legal fees. Alternatively, consider mediation once the discovery has been completed but well before the trial date where settlement offers can still reasonably be compared against the risks associated with trial.

Mediation can also assist the parties in negotiating new ways of doing business, such as:

  • including outside members on the Board of Directors to provide that “objective standard” and feedback;
  • developing agreements for regular meetings and communications;
  • creating or amending existing member agreements that address old and new issues;
  • negotiating succession planning before the triggering event occurs; and
  • stipulating to an expedited arbitration process for disputes.

The family business is often touted as our country’s key to economic recovery. Therefore, the key to resolving conflict in the family business involves three components. First, engage in early communication that addresses specific family issues and the “deal” of being in business together. Second, practice negotiation that recognizes the primary need to preserve relationships. Finally, use mediation which depends more on creative problem solving than a model of winning versus losing.

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