How to Handle Conflicts in Family-Owned Businesses

This is a follow-up to the previous blog. Conflicts are inevitable within businesses and families. Personal rivalries, differences of opinion, competition for resources, and questions of prestige can set individuals at odds and lead to warring factions with competing loyalties. Resolving conflicts in both settings is a delicate matter that requires balancing what is best for one person with what is best for the group. When family members are in business together, the balancing act can be harder and missteps can have a significant impact.

Sources of Conflict in a Family Business

Family businesses—defined as any business in which two or more family members are involved and a single-family controls ownership—represent the lion’s share of US businesses. They are a huge contributor to the national economy and, when running smoothly, can provide certain advantages over non-family businesses, such as loyalty and legacy.

Unfortunately, conflicts that arise in family businesses can also be more devastating due to misaligned business and family values. According to the American Bar Association, family business conflicts often occur over the following issues:

• The inability to separate business roles from family roles
• Personal differences that affect business decisions
• Aging patriarchs or matriarchs who worry that stepping down from professional responsibilities could lead to a loss of status in the family
• Lack of succession planning
• Parents who are torn about whether to split control of business interests equally among children or to distribute assets based on ability and interest
• Uninvolved family members who expect returns from a business to which they do not contribute
• The use of family business resources for personal benefit at the expense of others
• Sibling rivalries that affect the parents’ estate planning decisions
• Feuds between family members and in-laws

Market Basket Feud Shows How Family Business Conflicts Can Spiral

A well-known family business feud involving the supermarket chain Market Basket illustrates how conflicts can overlap and intensify.

Market Basket is a family-owned supermarket company that operates around ninety stores in New England. Forbes details how the business was started in 1917 by Athanasios (Arthur) Demoulas, who sold his single store to two sons, Mike and George. George died, and Mike did not make good on his promise to look out for his brother’s family. Mike instead diverted company assets to businesses he controlled, and the feud began. This led to court intervention and deepening hostilities between the two sides of the family, headed respectively by cousins Artie (son of Mike) and Arthur (son of George).

Suits and countersuits ensued. Accusations of certain family members not pulling their weight, stolen stock, diverted opportunities, and mismanagement finally came to a head when Arthur found a way to change the makeup of the board, which then fired CEO and part-owner Artie. This led to an employee strike and customer boycott. A buyout agreement in 2014 returned Artie to power and finally ended the decades-long saga, but the “winning” side had to incur significant debt to fund the transaction. This does not even take into account the many thousands of dollars in legal fees each side had incurred.

Legal Agreements in a Family Business

Contracts should be the primary mechanism used to establish a legally enforceable framework for any business—family or nonfamily. Contracts can set expectations and specify the means of dispute resolution if and when conflicts arise. These agreements are best made before any dispute arises.

The US Chamber of Commerce recommends a family business agreement that addresses role definition, a code of conduct, and the creation of a family council and advisory board. However, other business contracts can be used as well, including the following:

• Employment agreement. An employment agreement can help to bring a level of formality to working in the family business and can be used for family-member employees as well as nonfamily-member employees. A typical employment agreement spells out what is expected of the employee, workplace rules, prohibited employee actions, and grounds for termination.

• Shareholder agreement. Shareholder agreements are a must to ensure that shareholders are treated fairly and their rights are protected. This agreement creates the regulations by which a company is run, explains the rights and obligations of the shareholders, and outlines the relationship between the company and its shareholders. Perhaps most importantly, the shareholder agreement also addresses how conflicts will be resolved.

• Buy-sell agreement. A buy-sell agreement can be a standalone document or part of a larger operating or shareholder agreement. Its purpose is to control the transfer of company equity in the event that an owner dies, becomes incapacitated, or steps down. A buy-sell agreement gives other family members the option (or obligation) to purchase the departing owner’s interest. In a family business, this can keep outsiders from joining the business and allows a smoother transition to the next generation.

• Prenuptial agreement. Divorce litigation can introduce a source of conflict if the division of marital assets results in a non-family member holding an interest in the family business. Keeping in mind that half of all marriages fail, a prenuptial agreement can head off a conflict by, for example, separating business assets from marital property or providing a right to repurchase family business assets.

When Conflict Cannot Be Avoided

Some conflicts are unavoidable. They might arise suddenly or stem from years of unresolved tensions. Conflicts that cannot be settled contractually may have to be resolved judicially.

Because court proceedings are contentious and could cause further damage to family relationships, mediation is a possible alternative. Generally, mediation is faster, less expensive, and more flexible than litigation. Parties are permitted to hire lawyers, but they do not have to involve them. Mediation can even encompass other professionals, such as psychologists, who can help families work out underlying issues.

If the differences are irreconcilable and alternative dispute resolution fails, court might be the only option. As in the Market Basket case, a judge could order a buyout. However, as that case illustrated, a judge’s action may not put the conflict to rest and could actually prolong it.

After all, in a family business, members do not simply go their separate ways. They remain inextricably linked, which leaves the door open for a flare-up of tensions. Communication and a voluntary deal to end the dispute is preferable to a court order. However, equipping a family business with tools and structures can help it avoid the risk of intra-family disputes is an even better solution and can foster lasting success.

Proactive strategies that address potential conflicts in family businesses should be prioritized. If conflicts do arise, it is crucial to navigate them with fairness and tact. Family business lawyers should be consulted early and often to both avoid and resolve conflict. For professional assistance with issues affecting your family-owned business, please contact our office to schedule an appointment.

The following is provided for informational purposes only and is not, nor should it be construed as legal advice. Gregg M. Mielke is a fellow member of the College of the State Bar of Texas and has been practicing for over 30 years concentrating his practice in the areas of business formation and operations, construction, and commercial real estate.