(Don’t) keep it in the family

They say that blood is thicker than water, but occasionally blood can be spilled when members fall out over the running of a family business.

“We see it all the time” observes Rayner Grice, head of the Birmingham office and local family practice lead for national law firm Clarke Willmott LLP.

“Very often I am instructed on divorces for high-net-worth individuals where the principal asset is a family-owned business.

“The running of the company can become complicated by the personal fall out of the separating members which can then impact the rest of the family and it is sadly too common that in those situations considerable commercial value is lost as the parties focus on their dispute rather than running what might otherwise be a successful business”.

It can also cause great anxiety as to the impact a divorce may have on the future of the business. It isn’t just a separation though that can cause friction in a family business. A difference of opinion can become that bit more acrimonious as a result of the familial relationship between the parties.

“Those annoying, petty squabbles over the years can become amplified when relatives fall out about the running of the family business” adds Peter Brewer, a commercial litigation specialist at Clarke Willmott LLP.

“The problem then is that these disputes become protracted and difficult to resolve. As a result, they also become very expensive to effectively deal with.

“I think that prevention is probably better than cure,” says Peter. “A few practical steps can be taken to try and prevent disputes in the future.

What then are those steps? In Peter and Rayner’s view:

• It is sensible for there to be a shareholder’s agreement that defines the roles of the stakeholders in the business, and that effectively deals with what happens when a shareholder exits the business. That shareholders agreement then needs to be regularly reviewed and updated.
• Equality might work well when handing out toys to children or dividing up domestic tasks, but it does not work so well when handing out shares in a company. Make sure that the person who is the driving force in the business has some control, either by having enhanced rights attached to their shares or by having a greater proportionate share of the equity than the other shareholders.
• Does the corporate leadership have to be made up solely of family members? Consider having some external influence on boards, such as independent non-executive directors, professional advisers or family business specialists to offer balance and to help guide the family members through particularly difficult or contentious issues.
• Consider entering into a pre-nuptial agreement. This is particularly important even if one of the spouses is not directly involved in the business. The agreement could ensure that the stability of the business is preserved, for generations to come.

“It is the case that some relationships will break down no matter what precautions you take,” says Peter.

“A full-blown dispute that leads to litigation is likely to be very destructive indeed, with family relations affected or even destroyed permanently. Therefore, an early commercial approach to the dispute is very sensible. There are organisations that offer specialist counselling services to families in dispute, but if things escalate into litigation then an early engagement in some sort of dispute resolution (like mediation) is highly recommended”.

“Statistics show that the divorce rate is higher than the rate for the number of businesses that fail in their first year of trading,” says Rayner.

“Therefore, entering into a business with your spouse is actually shortening the odds of your business being successful long term. The precautions that we recommend are therefore sensible long term”.