The causes of family business disputes and how to resolve them

By Harper James

20 Jul 2023

Author image -Elizabeth Black.jpg.jpg

Going into business with family members has numerous advantages. Everyone involved will usually be heavily invested in making the venture a success. They often have shared values, trust one another and view the business as a long-term prospect. However, family businesses can also be an intricate web of complex relationships and difficult dynamics and, as such, are sometimes breeding grounds for conflict. 

In this article, Liz Black, senior business dispute solicitor at Harper James, discusses the common reasons family business disputes occur and the options available to individuals involved in a dispute. 

Why do family business disputes occur?

Since every family is different, so are the reasons for a family business dispute. However, most arise from a simple failure to properly document the nature of the members’ roles and responsibilities and an under-appreciation of the need to plan ahead.

Some of the main causes of family business disputes include:

Poor succession planning

Careful succession planning is key to the ongoing success of a family business and ensuring its smooth transition to the next generation.

Succession planning can be a thorny subject, necessitating difficult conversations and potentially causing disappointment. Competing aspirations, differing abilities, and conflicting visions for the future can create considerable tension.

As a result, many family business owners place succession discussions on the back burner, thinking they have ample time to address the issue or simply ‘hoping for the best’ in the event they suddenly become unable to lead the business.  

However, the consequences of poor succession and leadership planning can be catastrophic. Without a clear plan for the future, internal power struggles often erupt, resulting in a hostile working environment and unmotivated employees. Control may be taken by less competent individuals, causing those who are better qualified to leave the business, taking their invaluable commercial know-how with them. The financial impact on a family business can be severe, sometimes placing its future in jeopardy.

Lack of proper Shareholders’ Agreement 

An effective Shareholders’ Agreement is crucial to the effective running of a company. It regulates the members’ relationships by defining their roles and responsibilities and the extent of their ownership. Crucially, it can safeguard the shareholders’ interests when things go wrong by including a mechanism for disputes to be resolved (or prevented in the first place).  

The often-informal nature of a family business means that the necessity of a Shareholder’s Agreement can be overlooked. As a result, there is no document stating how the members intended to work together or address any disagreement. Protracted disputes can ensue, sometimes resulting in an impasse. In worst case scenarios, the situation can lead to a deadlock, with the only option being to wind up the company. 

Participation 

Clearly defined roles and boundaries are essential to the smooth functioning of any company but are particularly pertinent in family business situations. Cracks can appear if it is perceived that one family member is failing to pull their weight, or if a member feels that they are not afforded the same level of participation as others. When the extent of each member’s input is not clearly agreed upon, understood and adhered to, disagreements often surface.

Allocation of funds

Not all family members are directors and shareholders of the family company. Some may be content to take a more passive role, leaving the day to day running of the business to others. Sometimes, though, they may become unhappy with the director’s salaries, considering them excessive, or feel that the dividend paid is too low. The allocation of funds is one of the most common causes of resentment within a family business.

How to resolve a family business dispute

The options to settle a family business dispute are the same as with any other commercial dispute. 

They include:

Negotiation

It is always preferable to settle a business dispute as quickly and amicably as possible, and never more so than when it involves family members. Sometimes, setting time aside for open and honest dialogue between the parties can help them to articulate their positions and discuss how the issues might be resolved. 

Mediation 

Mediation is a form of ‘alternative dispute resolution’. It is a process through which the parties seek to resolve their issues with the help of an independent third party, the Mediator. 

Mediation is widely used in the context of business disputes, with excellent results.  It has numerous advantages, including:

  • It can preserve the parties’ business and personal relationships in a way often not possible when the parties become embroiled in litigation.
  • It is quick, often taking just a few days to organise.
  • The parties have complete control over the time, venue, choice of Mediator and format.
  • It is less formal and, as a result, less stressful, than litigation.
  • The parties can settle their disagreement on terms reflective of their commercial reality and family relationships.

On the downside, the disadvantages of Mediation include:

  • Whilst the Mediator can guide the parties and encourage settlement, nobody is legally obliged to engage with the process.
  • There is no guarantee that the matter will be resolved.
  • The process involves no consideration of the merits of either party’s position. 
  • There is no formal requirement that the parties disclose material relevant to the dispute ahead of the Mediation so each party must trust the other’s good faith.

Litigation 

Sometimes, a dispute is too deeply entrenched to be capable of settlement other than through litigation. In these cases, the outcome of the Court proceedings can shape the fate of the family business and dictate who will be involved in its future.

Whilst litigation is often considered a last resort, it does have several advantages, including: 

  • The litigation process compels the parties to disclose all documentation that may have a bearing on the issues.
  • The Judge will consider the merits of each side’s position and make a Judgment based on the facts.
  • Crucially, litigation delivers a clear outcome that cannot be disputed.

The disadvantages of litigation are well documented and include:

  • It is lengthy and expensive. Cases sometimes take years to get to trial and the costs can be prohibitive.
  • The outcome is inherently unpredictable. Whilst legal advisors can give guidance on the strength of each party’s case, the result is dependent on the individual Judge’s interpretation of the evidence and, ultimately, whom they believe.
  • Once a family has embarked on litigation, it can be impossible to rebuild their relationships.

Conclusion 

Going into business with your family can be extremely rewarding, both personally and financially. However, family businesses present unique challenges that can lead to discord if not addressed from the outset. It is crucial to take proactive steps to regularise each members’ roles and responsibilities and minimise the chance of future conflict.

Formal documentation such as a Shareholder’s Agreement is vital, regardless of the personal nature of the members’ relationships. In addition, fostering a collaborative environment that draws on each member’s strengths, values their input and rewards them accordingly will go a long way towards maintaining solid family relationships and enhancing commercial success.  

Latest news

1

Appley Bridge consultancy wins third industry award in USA EPIC Award Win

Appley Bridge consultancy wins third industry award in USA

17 May 2024

2

Navigator completes £131m takeover of Accrol accrol-papers-500x328.jpg

Navigator completes £131m takeover of Accrol

16 May 2024

3

Tech institute calls for business support in addressing skills gaps Lancashire And Cumbria Institute Of Technology

Tech institute calls for business support in addressing skills gaps

17 May 2024

4

Your comprehensive guide to tax planning for financial success AdobeStock_202193721 (1).jpeg.jpg

Your comprehensive guide to tax planning for financial success

17 May 2024

5

New Cleveleys shop draws hundreds of shoppers on first day Millstones Cleveleys

New Cleveleys shop draws hundreds of shoppers on first day

17 May 2024

Lbv116 Ltb Strip980
Background image for hub sign up block

LBV Hub

Reach 50,000 members of the Lancashire business community

Post your news
Post your events
Post your offers
Company profile
Social reach
Magazine coverage
Sign-up
Events
Wedding Dress Shopping Weekend
wedding12.jpg.jpg
LBV Hub Fundraisers
18 May 2024 - 19 May 2024

Wedding Dress Shopping Weekend

St Catherine's Hospice, Preston, PR5 5XU

10:00 - 16:00

Business Networking in Chorley - BNI Endeavour
EVENT LISTING SIZING Endeavour.png.png
LBV Hub Networking
21 May 2024

Business Networking in Chorley - BNI Endeavour

Oak Royal, Bury Lane, Chorley, PR6 8SW

06:30 - 08:30

Business Networking in Blackburn - BNI Vista
EVENT LISTING SIZING Vista.png.png
LBV Hub Networking
21 May 2024

Business Networking in Blackburn - BNI Vista

Hampton by Hilton, 2 Frontier Ave, Blackburn, BB1 3AL

06:45 - 08:30

Business Networking in Preston - BNI Diamond
EVENT LISTING BNI Diamond.png.png
LBV Hub Networking
22 May 2024

Business Networking in Preston - BNI Diamond

The Marriot Hotel, Garstang Road, Broughton, PR3 5JB

07:15 - 09:00

Business Networking in Lancaster - Eden Business Network
EVENT LISTING Eden Business Network.png.png
LBV Hub Networking
22 May 2024

Business Networking in Lancaster - Eden Business Network

The Borough, 3 Dalton Square, Lancaster, LA1 1PP

18:30 - 20:30

Business Networking in Accrington - BNI Zeus
EVENT LISTING SIZING Zeus.png.png
LBV Hub Networking
22 May 2024

Business Networking in Accrington - BNI Zeus

The Mill House, Corn Mill Yard, Accrington, BB5 5HX

06:45 - 08:30

Your Business Bootcamp
CBP-logo LBV.png.png
LBV Hub Networking
22 May 2024

Your Business Bootcamp

Burnley Football Club, Turf Moor, 52-56 Harry Potts Way, Burnley, BB10 4BX

08:30 - 13:30

Chamber Breakfast Networking
Chamber Logo1.png.png
LBV Hub Networking
23 May 2024 - 23 May 2024

Chamber Breakfast Networking

HIC, Lancaster University, Bailrigg, Lancaster, LA1 4AT

08:00 - 10:00

Business Networking in Burnley - BNI Kudos
EVENT LISTING BNI Kudos.png.png
LBV Hub Networking
23 May 2024 - 23 May 2024

Business Networking in Burnley - BNI Kudos

Prairie Sports Village, Windemere Avenue, Burnley, BB10 2FU

06:45 - 08:30

Creative Lancashire Networking Social
Untitled design-4.png.png
LBV Hub Networking
23 May 2024

Creative Lancashire Networking Social

Society1 Coworking Space, Preston, PR1 3LT

17:30 - 19:30

Business Networking in Lancaster - BNI Castle
EVENT LISTING BNI Castle.png.png
LBV Hub Networking
23 May 2024 - 23 May 2024

Business Networking in Lancaster - BNI Castle

Vale of Lune RUFC, Powder House Lane, Lancaster, LA1 2TT

06:45 - 08:30

Business Networking in Preston - BNI Brunch
EVENT LISTING SIZING Brunch .png.png
LBV Hub Networking
24 May 2024

Business Networking in Preston - BNI Brunch

Samlesbury Hotel, Preston, PR5 0UL

09:30 - 11:00

Advertise with us

Reaching 50,000 members, our print, digital and event platforms offer a fantastic way to raise your business profile and help you grow.

Find out more LBV116 Online Graphic
Subscribe now

Weekly news bulletin