A guide to conflict management in family-owned businesses

Conflict is common in all businesses, but it can be especially challenging in a family-run company, where emotions, relationships and financial interests often overlap. That’s why family-owned businesses should have formal documents in place that govern how the business is run.

Documents such as a family charter and a shareholder agreement may seem overly formal for a family business, but they help minimise the risk of conflict. When disputes arise, you can look back at these agreements to give you a plan for how to address them. Think of these documents as your roadmap through disagreements. With a clear process in place, you can work through the steps without causing a rupture in the business.

In this guide, we’ll explain how to reduce the risk of conflict through agreed rules and what to do if tensions escalate.

Key causes of conflict in a family business

Some of the common causes of conflict in family-run businesses include:

Informal arrangements

The business operates on a basis of word-of-mouth agreements and casual arrangements. This can work for a while, but as the company grows, it leads to confusion.

Distribution of dividends

Conflicts can arise between family members who want to realise more money from the business through dividends and those who want to reinvest profits back into the business.

Performance issues

Tension arises when a family member performs poorly, but expectations aren’t clearly defined. This can often be a delicate issue. Is it the case that they are cruising because the boss is their dad? Or do they need support and training to become more effective?

Personality clashes

In any business, there will be people who don’t naturally get along. This can be compounded in a family-run business, as it can feel like there is no break or escape from a clash. Personality clashes can get in the way of progressing the business if two family members can’t agree on business objectives and decisions.

A family member sets up a competing business

Having worked in the family business and learned the ropes, a family member decides to go their own way and set up a new business independently. This can be acrimonious with family members in the previous business, who feel that the new business is detracting from their success.

Succession planning

Who is the next CEO of the business? And when will the transition happen? Uncertainty and disagreements over succession planning can become a heated conflict. This lack of communication is widespread – fewer than half of family business owners in the UK have broached the subject of succession with their families, and more than 25% actively avoid discussing the business or its finances, increasing the risk of unresolved tensions and future conflict.

Understanding the impact of unresolved conflict

It can be tempting in a family-run business to ignore conflict so as not to ‘rock the boat’. But unresolved conflict slowly undermines trust and performance. It leads to growing resentment and frustrations.

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People begin to check out, and the business starts to underperform. You might see decreased productivity and more people leaving as morale plummets. The stakes are high, as in the UK alone, there are around 4.8 million family-owned businesses employing nearly 14 million people. Poor conflict management and leadership uncertainty don’t just impact the family – they also undermine employee livelihoods and the wider economy.

In the worst-case scenarios, it may even be necessary to sell the business – sometimes at below-market value – if the conflict can’t be resolved properly.

Conflict during succession and leadership transition

The transition of leadership raises three critical questions: who, when, and how?

Who?

In a family-run business, the next CEO is often another family member. Be aware, however, that this can cause resentment from hardworking staff members who are not family. Within the family, it can be difficult for siblings to submit to one another as ‘the boss’.

When?

The timing of the transition can cause conflict. An ambitious grown-up child may be ready to take on the leadership role sooner than the parent wants to step down.

How?

What does a fair distribution of shares look like when the current leadership steps down? Succession issues are often addressed in the owner’s Will, so all documents need to be updated and aligned to ensure a smooth transition.

Key documents that can help prevent conflict in family businesses

Formal agreements can feel heavy-handed for many small family-run businesses. But these agreements are the foundation of your business, on which your business can rely as it grows. These documents will help you avoid conflict or, at least, resolve it before it escalates.

Shareholders agreement

The shareholder agreement is the main agreement that comes into play to help the business run smoothly. It sets out the voting rights, responsibilities, and decision-making powers of various shareholders.

You may also want to include buy-out or pre-emption clauses for when a member wants to leave.

Family business charter

A family business charter is unique to family-run businesses. It’s not essential or legally binding, but it can be a helpful point of reference.

You can draft your charter together, collaborating to agree on some shared principles as a family and a process for making decisions. You can agree on your priorities as a business, and the main goals and objectives you want to achieve.

With the charter drafted, you can refer to it to help you navigate decisions, conflict, and succession planning.

Everybody feels as though their voice has been heard, and they’ve contributed equally, which leaves less room for disputes later down the line.

Articles of association

If you’ve set up your business as a limited company (rather than a partnership), you’ll have articles of association. The articles are the rulebook for running your business.

They define how directors are appointed, removed, and remunerated. They set out voting rights for decision-making and the process for passing shareholder resolutions.

You can amend the articles to suit the dynamics of your business. Having a written record of how your business is run helps to avoid uncertainty and confusion, which is often the cause of conflict.

Partnership agreement

If you’ve structured the business as a partnership, then it’s wise to have a partnership agreement in place, even if your business partner is a close family member.

The agreement sets out how you will work together, how profits will be shared, and what happens if a partner wants to leave the business.

Employment contracts and job descriptions

Employment contracts set the expectations for both parties. The employee has a clear idea of their roles and responsibilities, as well as the salary they receive in exchange. This can help manage any performance issues or dissatisfaction over remuneration.

Proven methods for conflict resolution in a family business

Here are 5 common stages of resolving conflict, starting with a conversation and ending, only if necessary, with legal action.

Step 1: Have an open discussion

Create a safe space for open dialogue to get to the heart of the issue and discuss options for a way forward.

Step 2: Involve a business coach

A business coach acts as an objective expert who can offer creative solutions that suit both parties.

Business coaches benefit from working with a range of businesses, and they are likely to have faced a similar situation before.

Step 3: Try mediation

A commercial mediator will encourage the parties to find a settlement. The mediator is impartial and is often legally trained or an expert in business.

This can be a way to settle things without damaging relationships.

Step 4: Attempt Early Neutral Evaluation

Early Neutral Evaluation is a process through which an expert or a judge would give their view of the outcome of the dispute if you started legal proceedings. It’s less common than mediation, but it’s occasionally used at an early stage in commercial disputes.

The decision isn’t binding on the parties, but it can give you a steer about who’s ‘right’ in the dispute.

Step 5: Issue Legal proceedings

Issuing legal proceedings is a last resort in any situation, particularly within a family business. It’s expensive and acrimonious and is most likely to create a ‘family war’ situation.

However, if you really cannot resolve the conflict in any other way, the court will give you a decision that is legally binding so that everyone has to comply with it.

Available options if conflict cannot be resolved

If you cannot move forward after a conflict, there are a few options that might suit everyone in the dispute. These include:

• The shareholder selling their shares and leaving the business
• Selling off a part of the business
• Selling the entire company

When to involve external professionals or mediators

Before any conflict arises, lawyers can draft the recommended agreements that you need to govern the business well. Having these documents in place will help you minimise conflict and navigate it when it happens.

Once conflict is afoot, it can raise the temperature if you involve professionals too soon. Try to talk it out between family members first. Then involve neutral third parties, such as a mediator or a business coach, first.

When parties instruct their own solicitors to take their side in a dispute, it can become complicated to find an amicable resolution. The dispute becomes expensive and stressful. However, if you’re really at an impasse, there may be no other way.

Preserving family bonds and business growth

It may seem counterintuitive, but a level of formality in your family-run business will help to preserve family bonds. Set out expectations clearly in a family charter, shareholder agreement, the articles of association, and in employment contracts and job descriptions.

This way, you have a written record of how you agreed to run the business, before disputes arise and tempers fray.

Having the right agreements in place – like a shareholders’ agreement, partnership agreement, and a clear set of articles – gives your business the structure to avoid conflict before it starts. If you’re setting up a new company or want help putting these foundations in place, Rapid Formations offers formation packages and services to support you at every stage of your business journey.