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How to prevent and resolve conflicts in your family firm

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In the second of a three part special on family-run firms, we look at how to prevent disagreements harming the business.

Working closely with siblings, parents or wide family members can often place relationships under more pressure than you would expect to see in other businesses.

As a family business owner, what can you do to mitigate the risk of disagreements harming the business?

First and foremost it is important to recognise that disagreements can actually have a positive influence on any firm, bringing to the table topics that generate debate and can cause new strategies to be adopted, new structures to be put in place and new processes and efficiencies to be introduced.

However, you may find that different generations have different objectives and attitudes to risk may well differ too.

Family firms are built upon relationships. When you work with your nearest and dearest there can be a tendency not to draw the line between business and family life.

Managing boundaries in the board room is clearly essential if you want to reduce the risk of disputes that could escalate out of control.

Over the past few weeks we have met many family businesses across the UK as part of our tour with Family Business United. Many have significant family wealth invested in the business. In these circumstances it is important to separate the roles of owners/shareholders in the business from those of management and family involvement on a day-to-day basis.

Common causes of dispute within family firms revolve around remuneration, reward, recognition and communication. Siblings employed in roles that have been created for them, reward packages that bear no semblance to market rates, dividend policies that have not been reviewed for many years and place a financial strain on the business, determining the value of the business at times of transition/succession.

One simple step that all family business members should appraise is their own financial independence, minimising any ongoing dependence on the business as much as practically possible.

All too often I hear business owners expressing concern that all of their wealth is tied up in the business and they are concerned about what could happen in the future. This will be magnified during any time of dispute with family members so personally managing individual assets and wealth separately from the business could help to mitigate the risk. A qualified financial planner can be invaluable here.

Here are some key steps that can help reduce the risks of a family feud developing, including:

– Developing an effective family code of conduct, outlining acceptable behaviours, roles and responsibilities

– Formalising an employment policy to ensure that family members are only employed in appropriate roles

– Benchmarking and reviewing salaries against market rates

– Introducing formal remuneration/dividend policies

– Making sure that confidential conversations remain as such

– Behaving appropriately with other family members, inside and outside of the family firm

– Working on developing appropriate procedures for dealing with issues as they arise to prevent them escalating out of control

– Using trusted advisers to help explore options and mitigate risks

It may also be wise to consider the need to review wills on a regular basis to ensure they reflect the current desires of the individual. This also addresses the issue of shares in the family firm to reduce the risk to the business upon the death of a key shareholder at an emotionally difficult time, as well as key-man insurance to help the business in the event that a crucial member of the team is no longer in situ.

As a family in business together, good governance stems from a clear vision, values and strategies and a framework to deal with issues as they arise.

Family firms that succeed for generations get the right people in the right place, supported by the right teams and have processes for dealing with differences, which helps to mitigate the risks of any long term damage to the business.

Penny Lovell is head of private client services at Close Brothers Asset Management

Part 1: The backbone of Britain: Why family firms are so important

< Part 3 Coming Soon: How to ensure a smooth transition process if you run a family business>

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