Addressing Conflict in Family Business
18th February 2020
Personality conflicts can be disruptive in any business. However, while non-family businesses are often reasonably equipped to deal with a dispute, conflict within a family business can be extremely damaging, causing deep unhappiness and even the failure of the business which supports the family. It has been said that the biggest destroyer of family wealth is not taxation or poor performance but failure to deal with family conflict. For this reason it is important that family businesses recognise the potential for conflict and address it as soon as possible.
When does conflict arise?
Conflicts can surface at any time but in our experience they frequently become apparent in connection with succession planning, in particular where siblings find it difficult to work together effectively. Crystallising succession plans can have the effect of formalising what has been unspoken and causing family members to question their place in the business and the family.
The fact that conflict presents itself at this point doesn’t mean that the root cause of the conflict was not present beforehand and it is important to be alive to the underlying reasons for disharmony. If the issue is limited to disagreement over a particular business decision it may be relatively easy to address. However if the issue is a symptom of a deeper problem (for example a feeling that someone has been excluded from decision-making), it will be important to identify and address the underlying issue.
Can conflict be avoided?
It may not be possible to avoid conflict altogether but there are ways to minimise the risks of conflict and it will almost certainly be easier to identify and address these in advance than to manage them once they have arisen. Some steps which any family business can take are as follows:
- Discuss succession: Discuss succession planning well in advance. Don’t dodge uncomfortable subjects or assume that everyone knows what is proposed. Ensure that all family members understand the proposals and have a chance to express their view. Where a potential successor is not chosen they should understand why. Conversely, where a potential successor is selected they will want some certainty around what is expected of them and the time period within which they can expect to step up.
- Ensure fairness: Establish a clear and transparent system for selecting (and training) successors. Much of the heat around succession planning can be removed if the system is clear and fair. One way to achieve this is to seek help from non-family members. For example, a long serving non-executive director may be asked to lead the process, overseeing the training and mentoring of the younger family members working in the business. This can be hugely beneficial to family unity because it removes suggestions of parental favouritism.
- Agree family priorities: Manage expectations of all concerned by setting out an agreed approach in writing (for example in a family charter). This may cover how succession will be determined but it may also address other useful aspects, for example the financial expectations of those who work in the business compared to those who do not.
- Training: Establish a system to select the family members who are best suited to lead the business, identify gaps in their skills and ensure that they receive education or training to address these gaps. In doing so it may be that one child will come to accept that he or she does not have the skill set to take over as managing director but is, for example, better suited to another role.
- Communicate: Take time (and get help if necessary) to understand the perspective and values of all stakeholders, ie what is important to each person (leadership, financial stability etc) and how the wider circle stakeholders (eg spouses) fit into this. In larger family businesses the process may be assisted by establishing a family assembly which ensures family members meet each other on a regular basis, and remain up to date and involved with the business. In smaller family businesses it may be more appropriate to schedule a family meeting every few months involving all family stakeholders (not just those directly involved in the business).
Defusing the situation
Even having taken the steps above, if conflicts still arise and it will be necessary to consider how best to manage them. Some possible approaches to this are set out below.
- Negotiated agreement: although this can be time consuming, a proper dialogue to agree expectations and responsibilities and documenting this can be the most thorough and effective approach, whether the principles are recorded in a non-binding document such as a family charter or more formally in a shareholders’ agreement. Part of the value of the process is making each person focus on the points which really matter to them and the areas where there is common ground (for example, all family members are likely to agree that education and opportunities for next generation are paramount). Having narrowed the key issues it is often possible to devise a solution which everyone can accept as fair.
- Separate responsibilities: Where there are issues around control it may be sufficient to delineate responsibilities or even enable next generation family members to run different parts of the business. Giving younger family members responsibility in this way can encourage entrepreneurialism and allow them to demonstrate their ability. An alternative approach might be to agree to alternate certain controlling functions (for example, each sibling could take the role of chairman for 2-3 years on a rotating basis).
- Demerger: In some cases, where disagreement cannot easily be resolved, the best approach may be to consider demerging part of the business and assets to give a family member a fair proportion of the business. This will not be possible in all cases but where it is, it requires careful planning to ensure, so far as possible, that the demerger does not trigger tax charges.
- Buy out: Where, for example, one or more family members are not working in the business and have no interest in doing so, an obvious approach is to offer them the opportunity to realise the value of their interest (ie to receive cash for their share of the business). This can be achieved in various ways. An approach we have used recently was to replace the departing shareholder’s ordinary shares with redeemable shares and agree to redeem those shares over the course of a number of years, thus making the exit affordable to the business. This approach can be very flexible. For example, the redeemable shares could be non-voting shares (to reflect the fact that the departing shareholder is not participating in the management of the business), or it could be decided to leave the departing shareholder with a small number of voting shares so that they have a small continuing interest in the family business. Whatever agreement is reached it needs to be clear to all parties whether or not the buyout of the shares represents a complete exit in order to avoid the family member receiving money and still believing that he or she should be able to influence business decisions in the future.
- Independent directors: Some family businesses bring in trusted non-executive directors or even a non-family chairman to help make decisions more objectively. At the most basic level the chairman could be given a casting vote and enabled to ‘hold the ring’ between siblings but this requires considerable faith in the individual concerned to make the right decision (and some sort of mechanism to remove them and recover any shares they hold if the system breaks down). A less extreme approach would be to introduce a non-family chairman with the aim not of altering the balance of voting power but of promoting good governance and facilitating dialogue between the shareholders.
- Non-family management: Transition to fully ‘professional’ (ie non-family) management of the business (so that the family remain the owners of the business but not the managers). This will only be suitable where the business is of a size which can support a non-family management team and needs long term planning to recruit and retain the right managers. It is unlikely to be a suitable solution where parents suddenly discover a rift between their children unless the parents are prepared to remain running the business for a number of years while a suitable management team is assembled.
- Exit: The decision to sell a family business can be very difficult, particularly where the business has survived through a number of generations and is seen as the family legacy. A number of factors will contribute to an eventual decision to sell the business including the long term prospects for the business and the next generation’s appetite to continue running the business. It is worth noting that the decision to sell need not be ‘all or nothing’. For example, a sale to an employee ownership trust can (currently) be extremely tax efficient, but also allows the family to retain a stake in the business and, to an extent, have a say in the direction of the business in the future enabling the family to protect the business’ ethos and workforce. Any decision to sell needs to be made well in advance and with professional advice to understand how to maximise the proceeds and also to plan governance arrangements for the family in the future in relation to management of its cash wealth.
Conflict between family members can threaten family harmony and undermine a family business. There are a number of ways to avoid it and address it when it arises. The key in all cases is not to ignore it because it is likely to get worse if not addressed.
Jim Aveline and Douglas Streatfeild – James are members of the family business team at Burges Salmon LLP