The family business - creating a safe environment for discussion

Conflict can arise in any environment, but in owner-managed businesses it can be particularly acute as a result of family connections.

Family firms face the same economic issues like all businesses, including market and technological changes, shifting customer tastes, ever tougher competition and political instability. However, their financial capability is often more limited and, in addition, they have less management depth than larger companies to cope with these pressures.

The difficulties inherent in balancing the goals and the needs of the family with those of the business have a further impact on the company and its ability to perform in the marketplace. For instance, the traditional divide between ownership (seeking dividend income) and management (seeking reinvestment for growth and future profitability) may be aggravated by differing family views of the future, in terms of whether to "cash in the chips" or "hang in for the long run".

One of the key advantages of a family business is that a cohesive force usually exists providing a strong sense of mission and a shared vision, ideally cemented by loyalty and commitment. The business may be financed by equity provided by founders or their successors, who are willing to balance the current return on their investment with a long-term strategy and continuation of the family heritage, referred to as "patient" capital.

The benefit of relatively low capital costs allows them to adopt longer-term business strategies, or to exploit market niches which are not sufficiently profitable for larger businesses which require higher short-term returns on capital.

A successful family business is also free of pressures for short-term profits and has the foresight and power to take a long-term perspective, saving and reinvesting capital, and viewing the business as a legacy for its heirs. However, whereas system theory teaches that all aspects (or sub-systems) of a system are interdependent, the family and the business - while containing many of the same people - are different worlds.

The family and business each have their own priorities, goals and expectations.

The family is typically inward-looking and, as such, decisions are often based on emotions rather than commercial grounds. This contrasts with business decisions which demand rationality and results. However, it is easy to see why the basis for decision-making differs; there is a history to the family which in terms of each individual pre-dates their involvement in the business. Further, a fully functioning family is likely to incorporate the characteristics of lifetime membership and unconditional acceptance of family members.

To the extent that the family system and the business system overlap, there is potential for conflict. This arises as the family system seeks to preserve harmony and minimise change, while at the same time the business system needs conflict and change if it is to survive and develop in the long term.

Accordingly, where the family and business system overlap, the personal and relationship issues in the family and the management need to be addressed and conflict resolution procedures adopted.

The scope for conflict is increased as the business, the family and the individual all have their own needs, goals and stages of development. However, harmony is a rarity as the stages through which a business progresses are not necessarily in synchronisation with the family's or individual's stages of development.

To prevent conflicts causing serious harm it is important to create a "safe" environment, where all parties feel able to be open about concerns. The presence of an impartial adviser helps in this, but certain ground rules are essential:

1. listen respectfully and do not interrupt

2. focus on issues, not personality

3. leave titles aside/treat everyone as a peer

4. avoid attacks: make criticism constructive.

Be systematic when dealing with conflicts and clear about whether it is a family dispute or a business dispute. Do not assume everyone sees things the same way and give people time to explain. Make sure everyone understands each other's motives. Be clear about what kind of solution would suit everyone and write it down. Weigh the pros and cons of options honestly and openly. Finally, take an opportunity to reflect - it is better to sleep on decisions rather than be rushed.

However, it is better to head off conflict before it arises: lay down clear ground rules from the first day of trading, making sure everybody knows their roles and responsibilities. Make sure there is a clear shareholder agreement stating, among other things, voting rights and dividend policy, payment terms on sale of shares and how appointments are made.

(To be continued)

Kenneth A. Bonnici is partner and head of Business Advisory Services at Grant Thornton, an international firm of accountants and consultants providing assurance, tax and specialist advice to owner-managed businesses. E-mail: kbonnici@gtmalta.com