Disputes already create significant risks for a small business, but if that business is owned by family members, those disputes can become even more damaging. Emotions run high, administrative and managerial roles get muddled, and the organization itself is put at risk. A divorce involving a family business can be especially difficult for both the organization and the parties involved, particularly in Texas where the business may be considered communal property.
Of the 5.5 million family-owned businesses in the United States, just over 30% survive into the second generation, and only 12% make it to the third. Family business disputes can be difficult to weather, which is why the assistance of a family business lawyer is so crucial when a conflict occurs.
Common Causes of Family Business Disputes
Family-owned business disputes often result from the unique dynamics that play out when family members go into business together. Some of the most common causes of these disputes include the following.
Failure to Separate Family Roles from Business Roles
First, there may be a failure to separate family roles from business roles. The role one plays in a family—such as a parent, son, or daughter—often bleeds through into the administrative dynamics of the organization itself. However, this may interfere with the business’s ability to function, especially when those roles don’t actually overlap.
For instance, while a parent may have certain level of authority in the family relationship, their role may not take the same shape in a business partnership. Emotions and pride tend to get wrapped up in business decisions, potentially undermining the organization’s ability to function. Since family relationships can supplant business relationships in these contexts, it can compromise operations.
Changes in Family Relationships
Changes in family relationships can have a dramatic effect on a business. A common example is a divorce involving a family business. Family law and business law often don’t overlap very well, and often, family law takes precedence, potentially to the detriment of the organization.
One example of this occurs in the course of business valuation and dissolution. With Texas being a communal property state, a business founded by two spouses would likely be split 50/50, which may complicate the viability of the business. The result is often a valuation dispute.
Finally, succession issues may arise. No one likes to talk about it, especially when family members are involved, but it is absolutely crucial for a business to have a well-constructed succession plan for the event where an owner, partner, etc. passes away.
If a succession plan isn’t designed to create a fair process for choosing heirs—or if there’s no such plan in the first place—it can lead to disputes, often with members of the same family facing each other down in a legal battle. Everyone needs to believe that the individuals chosen to take over the family business have a real right to assume those roles, and that requires a well-thought-out process.
Preventing Family Business Disputes
The best way to deal with family business disputes is to prevent them from occurring in the first place, followed closely by having a solid plan in the event that a dispute does occur. Some preventive measures family businesses can take include the following.
Clearly Outline Business Duties
Business duties and roles need to be clearly defined in order to separate them from family roles. Having the roles of each stakeholder clearly defined and readily visible can help prevent family roles from bleeding into business operations. This can both reduce the likelihood of a dispute while also expediting dispute resolution should such a conflict occur.
Involve Outside Advisors
Having an outside, unbiased view on your business is also helpful. An advisory board composed of non-family members can help counteract the emotional relationships and clashes that may arise by providing an outsider perspective. Members of this board should be knowledgeable and trustworthy, and they might include such individuals as an attorney, financial advisor, etc.
Handle Succession Planning Early
To prevent disputes involving succession, you need to consider succession planning early on. Heirs shouldn’t be elevated to positions of power without adequate preparation or consideration, and they certainly shouldn’t be forced or pressured to accept them. Good communication is vital to making sure this process is handled fairly, cleanly, and successfully.
Have an Established Dispute Resolution Process
Finally, an established dispute resolution process is vital to the management of any organization, and it’s especially important for family-owned businesses. A simple arbitration clause isn’t sufficient—it needs to be robust enough to withstand personal clashes between family members. Clear processes need to be set forth for choosing arbitrators/mediators, handling proceedings, and so forth. A business dispute lawyer can provide valuable input when creating this process.
Family Business Dispute Resolution
Of course, preventive measures may fail, and if family relationships change through divorce, death, or estrangement, it can lead to a costly dispute. In these cases, it’s best to involve an experienced family business lawyer. The attorneys at Reid Dennis Frick can help you navigate the complex legal landscape that often encompasses these types of disputes and represent you during negotiations. To schedule a consultation with adept business dispute lawyers in North Texas, contact us today.