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How to avoid costly disagreements in family-run businesses

Family businesses play a vital role in our economy. In fact, more than half of all businesses nationwide - from startups to established enterprises that span generations - are family-run.*

Yet they aren't without challenges. As anyone who has been involved in a family-run business can attest, disputes are often heated, especially when you throw complex family dynamics into the mix.

Disagreements commonly erupt over these three key issues:

1. Who does what: Family businesses tend to lack clearly-defined roles. As a result, multiple family members may end up vying for control. Or, by contrast, one person may end up shouldering too much of the burden, especially in newer businesses that require a lot of sweat equity.

2. Business decisions: Running a successful business requires making strategic decisions all the time. When family members can't get on the same page, it can sidetrack or stall the business. Disputes often center on crossroads such as deciding whether to:

  • Acquire a new business
  • Sell the current one
  • Invest more back into the business
  • Take the business in a new direction
  • Streamline operations
  • Take on new employees or investors

3. Succession: What will happen when the family members currently running the business can no longer do so? Many family businesses aspire to create a multigenerational legacy. However, the mechanics of shifting power to the next generation can be complicated. Who, exactly, will take over? How and when? Careful planning - well in advance - is essential for overcoming hurdles and avoiding setbacks during the fragile transition process.

How to avoid costly disagreements

Keep your business on track - and avoid the expense of drawn-out disputes - by following these tips:

  • Set expectations: Establish clearly defined rights, roles and responsibilities among family members who are involved in the business.
  • Don't gloss over the paperwork: There's a natural tendency among family members to keep business arrangements informal. Yet that can backfire, leading to costly disputes with no objective evidence of what was actually agreed to. It's well worth the hassle to put everything in writing - including contracts, employment agreements, meeting minutes and governing documents.
  • Anticipate potential disagreements: Decide in advance how disputes will be resolved - preferably in a way that will avoid costly litigation, such as mediation or arbitration. Address likely sources of disagreement before disputes arise.
  • Keep family and business matters separate: Set boundaries for the sake of both your business and your family relationships. Don't let personal issues cloud your business arrangements or vice-versa. Additionally, make space to spend quality time with your family members apart from the business.

Being involved in a family business can be incredibly rewarding. It can also be incredibly stressful. By following these steps - and staying attuned to potential roadblocks - you can help ensure the success of both your business and family life.

*Source: Benjamin Means, "Family Business Disputes," Business Law Today (February 2015).

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