Eight questions family business owners need to ask to avoid business-critical disputes

This is the first of a series of articles for family business owners and advisers in which we will examine some of the major pitfalls which family business owners need to be aware of in order to avoid the types of disputes that can threaten the foundations or existence of family businesses, whether they are structured as companies or partnerships.

Why family businesses, specifically?

While family businesses come in a huge variety of shapes and sizes there are common themes. In particular:

• Because they are often built up over time between people who are very close to one another (geographically, emotionally, and in terms of blood relationship) they often involve a significant degree of trust.
• That trust may mean that arrangements are not as formally documented as those for other businesses.
• There may also be specific expectations from different family members around their role within the business on a long-term basis.
• Those expectations may not align with those of other family members or the parties’ priorities may have diverged over time.
• Family businesses often need to plan on an intergenerational basis. That may bring a wide range of competing viewpoints to the table.
• When disputes arise it is crucial to try to resolve them in as constructive a way as possible to retain the family relationship – where possible – as well as the best interests of the business.

So what do I need to think about?

The key questions for family business owners to consider (which we will look at in more detail throughout the rest of the series) are as follows:

1. What is my business? How - legally - is the business structured? Is it a limited company? Is it an LLP or a traditional partnership? Is the choice of structure (still) the best choice for this business at this time? This matters because: different legal structures impose different 'default' rules and expectations and different remedies if there is a dispute.


2. What is it really? Does the structure reflect the reality of how the businesses run? For example, if the business is a limited company is it run like a 'normal' commercial limited company or is it in reality running in a way that is closer to a partnership? This matters because: a chosen structure can be undermined by actions on the ground and the resulting implications that are brought into play. For example, if a limited company is run as a quasi-partnership.


3. Who is involved? Not as simple a question as it may at first seem… Are all the partners listed on a partnership agreement? Or is the agreement unwritten? If dealing with a limited company, are the shareholders as shown at Companies House correct? This matters because: if it’s not clear who the parties are, someone unexpected may have rights you don’t want them to have, or someone business critical might not have the rights they need or you want them to have.


4. Who owns what? This applies to the business and also to the land and assets used by the business. How do you tell? What if there are trust structures in place that hold property or shares? This matters because: the business might not own the assets it uses – if it doesn’t then there may be major problems for the business when the asset owner leaves the business or dies, or divorces. Trustees may have specific duties that don’t align with business needs and none of this may be clear from the documentation, so can come as a surprise.


5. Someone says they were promised something significant – what now? Family businesses and the interaction with proprietary estoppel. If a family member has, for example, been 'promised the farm' was the promise clear enough, who made it, how was it relied upon and where is the detriment? How does this work when relationships have deteriorated or the promisor is dead? This matters because: the 'thing' that’s been promised might be critical to your business and if you lose it your business viability could be majorly undermined.


6. Someone claims they are being frozen out – what can we do? What remedies are available to those who are being excluded from the management of a family business? What if someone thinks that they are being excluded, when you think that they are behaving inappropriately, and you are simply protecting the business? Knowing about this in advance can avoid a messy and expensive fight about it further down the line. This matters because: the scope and form of the remedies will depend on the structure of the business, and some of those remedies can be wide-ranging. Not all businesses are in a position to reasonably afford to buy out a significant minority shareholder for example.


7. What if someone wants to retire? Or knows they will want to? Succession planning and generational change arrangements are absolutely critical to family businesses. Managing that well, early and carefully provides a brilliant foundation for the continued success of the business. But what happens if that goes wrong or when succession plans are thwarted by deaths that happen in the 'wrong' order? This matters because: if this isn’t properly provided for by the type of business structure or by the arrangements in place for your specific business, retirement or death may have the unintended consequence of terminating or dissolving the business as a whole. Or it may be very difficult to extract the value of a 'share' on leaving.


8. What if someone wants out? Or you want them out?! How can parties extract themselves from the family business? Or extract someone who is causing issues? How does this work practically and logistically when the businesses still has to operate on a day-to-day basis, particularly when land or other key assets are involved? This matters because: the options available will vary significantly depending on the structure of the business. If not considered in advance that may also need to be worked through on an urgent basis while still trying to maintain business continuity.

So what now?

Advance planning is time well spent and may well avoid a dispute. But even if you are already in a dispute, or heading that way, there are ways to improve your position and mitigate potential risks or losses. We will go through those in detail in our coming series of articles – and we are always just an email or call away if you need us in the meantime! If you have any questions, please do not hesitate to contact Maddie Dunn or your usual Burges Salmon contact.