Protecting The Family Business: Pre-empting Disputes

November 19, 2024

Protecting The Family Business: Pre-empting Disputes

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By Fiona Hughes

Family-run business disputes are among the most common and difficult of commercial disputes.  The business may have been a success from start up or passed down through the generations, and operating smoothly until a trigger event is the catalyst for things to go wrong with seemingly little notice.

What can go wrong?

Regardless of the locality, type of business, or scale of funds involved, family businesses can be derailed quickly by the same issues. A crisis in senior management can cause the same risk for a small local hairdressing salon as an international property investment company. Triggers often include:

• the death of a founder parent or retirement of long-established character
• the separation or conflict in a husband-and-wife team
• a disagreement or misunderstanding on distribution of profit
• a change in family circumstances or expectations

These triggers can have immediate and explosive consequences, shifting the dynamic and sending the business into a spiral. Power struggles, internal rivalries and changing motivations can mean the previous business strategy is threatened or no longer works for the characters involved.

What is the impact?

Business disputes can cause real problems for the day-to-day running of the business, productivity, staff levels, and future success. The fall-out from badly handled disputes is potentially disastrous and can cause deadlock in decision-making, conflicts of interest, or the business being used as a pawn or tool in a wider conflict by less competent parties. The emotional connection to family businesses can really conflict with its commercial and realistic needs.

Prevention?

Partnerships, group companies, sole traders and limited companies, while facing the same problems, have very different governance structures and requirements for successful management. Some immediate steps businesses can take to prevent bigger problems include:

• creating and communicating a clear succession plan
• clarifying directors’ roles and jobs including remuneration and employment contracts
• a partnership agreement dealing with co-working, profit, dispute and retirement
• updating articles of association and shareholders agreements dealing with the company’s rules and decision-making

Family businesses, by their nature, are often informally run and leave a lot unsaid, so there has to be a balance between avoiding future disputes and causing problems by trying to prevent them.

What happens when something needs resolving?

Family businesses can be rewarding and successful, but do come with specific challenges which, if not dealt with early, can cause stressful and problematic situations, financial loss and breakdown of family relationships.

At Darwin Gray, our experience in acting for both the business and the individual stakeholders involved in family-run businesses allows us to offer clear and confident advice, understand the commercial options for early resolution and identify how clients can best protect themselves in the future. Sometimes an independent mediator is needed to focus the parties on resolution but the timing must be right. The last resort is litigation when there is no other way forward and there is real prejudice to the company or to stakeholders.

All resolution options come with advantages and risks, on which we are able to advise and offer recommendations. If you would like to discuss a business dispute or any of the above, contact Fiona Hughes for a free no-obligation conversation on 02920 829 100 or via fhughes@1stisp.co.uk.