Newspapers regularly recount report lurid stories of the breakup of successful family-owned businesses arising from irreconcilable disputes over money. How do these conflicts come to this sorry end? And how, many families ask, can we prevent our business and ownership quarrels enriching lawyers and accountants while impoverishing ourselves? What is needed is a structured approach to not only avert conflicts in the first place; but, when they do occur, to minimising their impact and, importantly, their financial and emotional cost.
First Principles
Successful families need two key things - to stay together as a close family group and to manage their business interests as an integrated and cohesive unit.
First, they define, and then commit to, an agreed vision of what they want to achieve as a family. This vision, which should be clearly documented, must set out not only the means by which the family goals are to be attained but lay down some clear standards of measurement.
Second, to maintain cohesion and avoid conflict, successful families compile an inventory of all family assets. Once again, documenting the process is all important. The ultimate aim of this exercise is to identify the key financial goals of the components that make up a business family: the family as an integrated unit, those within each distinct family group and each individual family member. To do this, a clear and agreed valuation of underlying business assets is an essential starting point.
Adherence to these first principles is essential. No attempt at anticipating family feuds will be effective unless there is full agreement and understanding with respect to these stated goals. It is often said the greatest threats to a family fortune come not from poor management of the underlying assets but from the family itself. The avoidance of family-induced “entropy”, or erosion of wealth, and the slower disintegration of capital over successive generations must be based upon a well-defined “road map”. This involves well-regulated structures and governance vehicles to guide the process.
Agreeing at the outset on common goals and a clear course ahead is only part of the process. Just as important, but often overlooked, is the need for periodic evaluations of the family structure, strategy or agreement. None will remain effective unless it is regularly assessed to objective standards accepted by all those involved. As family circumstances inevitably change and differing needs emerge from each successive generation, the family ‘plan’ must be capable of evolving to fit the new realities. If no such plan exists the likelihood of conflict is high.
But what happens if family members are already in conflict? Attempts at reconciliation are unlikely to succeed unless the family agrees to return to these first principles. It may be necessary to restart the entire process from scratch.
Defining the Issues
Before the family vision is expressed and the conflict-avoidance “road map” set out, the family needs to undergo a period of introspection. The catalyst for this, and a spark for potential conflict, is often a singular event; : the demise of the patriarch or, for example, a realisation that the business
is in trouble, for example.. This time of introspection is an opportunity to consider what is important to the family as a whole and to the individual family members. The family has to decide whether the family itself or the business is ultimately more important. Put another way, the family should ask itself whether it is a family in a specific business or a family in business together. Participants in this process also have to determine if their current business is the only activity that should involve the family. Not uncommonly, family members express the view that being in the same business is a source of division rather than unity. If so, can the family reach a consensus that the business can be made a bond that keeps the family together? For that to occur, family members may have to seek outside advice on the compromises necessary to reach that goal.
It clearly helps to avoid future conflict if each member freely airs their particular motivations and financial objectives. Together with all the others concerned, they must then determine to what extent, if any, their own interests compete or conflict with the overall aims of the family. This presupposes an agreement has already been reached on realistic financial targets for the entire family group. Setting goals, individual and collective is one thing, deciding on whether they are achievable, and how, is another altogether. But there’s no escaping the need to put in place an objective and dispassionate analytical process at the outset. With the best will in the world, though, all this may still not be enough to avoid conflict. Therefore, the initial family
“road-map” must include a neutral and formal method of settling disputes as and when they arise. This method should be clearly defined and documented. Family members must be committed to fully examining the causes of a particular conflict. If attempts at conflict resolution have failed, they must be evaluated and the reasons for failure analysed.
Choosing an Arbitrator
When professional outsiders are brought in to help resolve family conflicts, they should have a set of governing principles under which they operate. Here are some key ones:
\- Advisers should insist on treating the family itself as the client – not the patriarch, nor some faction within the family. To be engaged by one particular family member or group will create an immediate presumption of bias that will undermine success. In establishing the terms of any advisory mandate, it goes without saying that a high degree of co-operation from all family members involved is required, with their acceptance to dedicating a significant amount of their time to the exercise.
\- The family’s consent to full disclosure, on a documented basis, the asset base of the family, is needed. For ultimate success to be achieved, it is essential the conflict resolution exercise be driven by facts, not estimates. If no such data on the asset base exists, it may be necessary to obtain independent valuations from the family’s accountants.
\- Advisers need to be given the scope to challenge and confront any preconceived ideas, either collective or held by any single family member, however dominant their personality or important their position.
\- The entire family has to totally commit to any agreed compromise that is finally reached. It is essential all family members understand the economic consequences, or penalties, that may ensue if any individual or faction breaches an agreement previously reached.
Tackling and Resolving Conflict
So much for the governing principles. How do we tackle the practicalities of conflict resolution? In essence, each project can be divided into three distinct phases: Information Gathering, Documentation and Implementation.
Information Gathering: The starting point can be the preparation of the family for the project and establishing a timetable for each phase. An agenda for the project needs to be set out and each family member must be provided with the tools through which their input to the project can be provided and measured. Then follows the critical process of interviewing family members, assisting in the completion of the information record, and verifying the data supplied. Part of this exercise involves compiling a register of all family members, their personal details and an inventory of all assets. It is at this stage a formal valuation of the assets may be sought. Discussions with each individual family member and family group their respective goals and perspective on the issues should also be held. The aim is to highlight the areas of convergence and divergence, and any problems with existing governance mechanics.
Documentation: In our experience, we prepare a draft of a “Family Charter” defining, where possible, shared family goals. If we believe reconciliation is unattainable, a “road map” to a realistic compromise will be suggested. Typically, the road map will outline the legal, structural and administrative steps required to achieve the desired result. Each family member is required to execute an “in principle” agreement to the strategy. Should individual needs force a variation of the strategy, they will be documented and settled before the start of Phase Three. If this cannot be achieved and obvious compromises prove illusory, then discussion of these contentious issues will be temporarily set aside until Phase Three.
Implementation: This involves the formal submission of the plan to the family as a whole. The plan will incorporate all the compromises agreed in Phase Two, Documentation, and an agenda of the outstanding issues. It is not until the family has had the chance to “swallow” and accept the plan, that a family meeting should be organised. The critical purpose of such a meeting is to discuss and ultimately agree upon the outstanding, contentious issues. Agreement by all family members has to be reached if the preparation of the governing documents is to proceed, with the assistance of local legal counsel. [Notice that the involvement of lawyers is kept to a minimum, and usually at the end of the exercise.] It is important to periodically evaluate or monitor the family structure, strategy or agreement, reached when the family is in harmony. It is even more essential, therefore, to do so at times of family conflict. The role of an outside adviser in such a situation does not end with the signing of the governing documents. The family should require them to verify that the (new) structure and strategy continue to work as intended. The adviser must also ensure the terms of all documentation are adhered to and key milestones of success are reached.
Payment
Paying fees to your adviser may sometimes add to the emotional pain of conflict resolution. It can also help concentrate the minds of family members, acting as an incentive to reach consensus and implement a plan. In our experience a useful approach is for the family to agree with the adviser on a total fee for the project that includes both a flat fee and time cost charges. The agreed sum should then be paid into an “escrow account” from where regular billings would be settled by the family. This is not only a useful administrative approach, but also one that serves to focus the family on the need to make progress. The more entrenched individual attitudes and positions become, and the more unwilling certain family members are to compromise, the clearer the financial cost to the family. The desire to resolve conflict and the commitment of the family to the project can be enhanced if each family group, or each member of the family, contributes to its cost. In this way, everyone is motivated to resolve differences and conclude the project as quickly and as amicably as possible.
