Page 34 - May-Jun 19

FEATURE

usinesses that last share
common traits. For example,
they have written ownership
agreements with key terms;
Bthey are structured to prevent
conflicts and disputes between co- The true culprit of family business
owners; and they have planned for timely
succession to manage next generation disputes is often lack of an agreement,
expectations and prevent frustration. or one that is either unclear on
Absence of these key fundamentals fundamental and key issues, or does
will likely cause lack of alignment
between owners preventing financially not address them at all, leaving
sound companies from lasting.
the family members to their own
The focus of this article is on family means to get what they want.
businesses and the squabbles that
frequently lead to business break ups.
By their nature, family businesses are
inherently susceptible to business
breakups. It is easy to hold non-family
members at arm’s length and treat them
solely as business partners. But when
they gave birth to you, you live with
them, you spend Thanksgiving dinners
with them, or you are the Godparents of
each other’s children, the dynamics of The following case study shows how to make sure her stake in the company was
the business relationship change. There my client got caught up in a family protected, and specifically that Don could
is no longer the comfort that comes business squabble that ended up in not make unilateral decisions that affected
with a non-family business in which the the breakup of the business, primarily her income from Electrix. Both Don and
participants can just walk away and cut all due to the lack of clarity in a key Sharon agreed that their two children,
ties without consequence beyond the four provision in their ownership agreement. Mitch and Fran, would one day take over
walls of the brick and mortar business. Although the case study involves a the company, and that Mitch would be
family business, the lessons learned are CEO. But at that point, they were not sure
Typical family business disputes arise equally applicable to preventing disputes when their children would be capable of
between parents who founded the between unrelated business owners. doing so. Sharon and Don also did not
business and their children; between want Mitch and Fran to have control over
siblings who are wrestling for control of them and did not want Electrix to be run
their parents’ company; between in- The Case Study by a third party like one of their children’s
laws who have married into the family spouses. Accordingly, their agreement
business and the founding parents’ Don and his wife Sharon founded provided that Don would continue to be
children; and between spouses who Electrix, an electrical supply business, the CEO for the “foreseeable future.”
have started businesses together, and each owning half of the company. With
are in the throes of a marital divorce. their combined hard work and business To protect Sharon’s interests, Don had
smarts, they brought Electrix’s annual to obtain her consent to enter into any
Family business disputes are typically sales into seven figure numbers in long-term leases, to pledge the company’s
characterized by lying, deception, back just a decade. The business, however, assets, extend credit to another entity,
stabbing, self-dealing, attempted coups, took a toll on their marriage, and they or to sell or acquire significant capital
theft, extra-marital affairs and jealousy. eventually divorced. As part of the assets. In addition, Sharon could attend
These, however, are the symptoms and divorce, they entered into an agreement board and stockholder meetings, had
not the cause. The true culprit is often concerning their interests in Electrix. access to the books and records, and
lack of an agreement, or one that is they would jointly decide bonus awards.
either unclear on fundamental and key The key issue between them was who
issues, or does not address them at all, would run the company. Don had always Recognizing that equal ownership of
leaving the family members to their been the CEO and wanted to continue Electrix could result in voting deadlocks
own means to get what they want. in that role for as long as he wanted. between them, Sharon and Don formed
Sharon did not object, but she wanted

32 Insights Magazine | May/June 2019 | www.ieci.org