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How To Resolve Disputes In Family-Owned Businesses

Originally published: 10.01.11 by Mike Coyne

Planning ahead can prevent costly legal battles later.

If you are part of the management team of a family-owned business, you have no doubt fantasized about how good life (and business) would be if you did not have to contend with other family members. You are right in thinking that way. Family-owned businesses present unique and difficult problems that are generally not found in other closely held businesses.

David Gage, a psychologist specializing in family-business mediation, points to a recent University of Minnesota study that found that half of the second generation working in family-owned businesses were dissatisfied with their jobs, primarily due to family-related conflict. Fifty-two of 59 family members surveyed reported tension and stress in their family-business relationships.

Yet, family-owned businesses can and do succeed. What is the secret? Numerous family-business advisers believe that the starting point is to acknowledge that the family-owned business is not like other businesses. Business decisions impact family relationships, and issues among family members impact business. If the business is to succeed, dealing with these complex relationships must be part of your business planning. Here is a framework for approaching these issues.

Is The Family Relationship Important?

This may seem like a

harsh question, but it needs to be asked. Sometimes, the family relationships that exist in a business simply aren't that important. A few years ago, we were involved in representing a shareholder who was in business with a couple of first cousins. Most of the members of the prior generation were deceased, and the families of the cousins involved in the business were not particularly close. Clearly, but for the accident of birth, the related parties who were in business together would never otherwise be business partners.

Because the family relationships were not important, our client was comfortable disregarding those relationships and approaching his dispute as he would a dispute with an unrelated party.
More often, the family relationships are important. In these cases, dispute resolution will often involve a balancing of business interests with family interests, and the ultimate resolution will likely be less than satisfying from both a business perspective and a family perspective. Unfortunately, more often than not, family members do not agree on how to balance those interests.

How To Get On The Same Page

Family-business disputes are more easily resolved when family members have planned in advance for dealing with the inevitable problems that will arise. A good starting point is to develop a business plan that acknowledges and recognizes the impact that family relationships have on business and discusses how the business and family relationships will be balanced. Such a plan should have a very specific description of the roles of various family members in the business as well as expectations with respect to job performance.

The family business plan should also include a detailed procedure for resolving disputes between and among family members. We frequently recommend the use of an outside advisory board comprised of individuals nominated by each party or shareholder, with the condition that a representative may not be another family member. The goal is to provide each party with an advocate who is not emotionally involved in the dispute.

Our best advice, however, is to involve a family business adviser on an ongoing basis. Throughout the country, there are highly qualified family counselors and family business mediators who do a terrific job of helping family-business owners avoid falling into crippling and destructive disputes. Having such an individual attend your regular board meetings will, in the long run, be more cost effective than involving lawyers and advisers when a dispute arises.

Michael P. Coyne is a founding partner of the law firm Waldheger Coyne, located in Cleveland, OH. For more information of the firm, visit: www.healthlaw.com or call 440.835.0600.

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