Family business

Family Business – A Contract to Minimise Conflict in Family Business

Arguments, disagreements, disputes are all a fact of life especially in family business where often family members do not see any boundaries.

When disputes arise in a family business it is important they are dealt with efficiently so there is minimum impact on commercial operations.

Managing conflict

Managing conflict can be unpleasant but it must be done so confidentially to ensure no bad publicity, and not to impact commercial relationships with suppliers and customers.

As family members are in business with each other it is important that a contract exists to capture the essence of the agreement and minimise potential disputes.  A handshake deal poses many problems if a disagreement arises. The creation of a shareholders agreement (contract) is an ideal way to help avoid or set out a roadmap for how to handle conflict.

A well-drafted agreement prepared by an experienced commercial advisor will contain a dispute resolution. Alternative dispute resolution clauses in a shareholders agreement will require the parties to attempt to resolve the issue by a preferred method. This will assist with outlining a dispute resolution route that the parties can invoke should a disagreement arise and ideally prevent the matter from reaching court.

I have seen successful family businesses reaching crisis point because of internal disagreements.  If there is no clear structure within the business and a family member

chooses to exit with their equity that cost alone can make the business unsustainable.

Below are some key areas family businesses need clear structure on:

  1. Who makes the final decision – appoint an MD
  2. Sign off on expenditure
  3. Salaries and Dividends
  4. Agree roles
  5. Shareholders agreement
  6. Method of valuing shares
  7. Exit options, lead times and policy

Alternative dispute resolution is an attractive way for a family to resolve a dispute because of the discretion available in using these methods. Typically, methods used include negotiation, mediation, arbitration and adjudication.  It is important to note that it is a voluntary process requiring the cooperation of all parties. It can save time, money and negative publicity that court proceedings bring.

If a family does not have a dispute resolution plan in place (including a plan for public relations) it should seriously consider creating one, for commercial reasons.

My advice is talk to an independent professional in confidence and put a plan in place now to mitigate potential issues.