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How Does a Family Business Dispute Differ from a Commercial Business Dispute?

Posted on May 21, 2014 by Steve Shapiro

Every dispute is subject to an understanding of the law. The law presents a clear framework and factual background of each dispute. Understanding the law helps us form both the contractual/business context and the relationships that reveal the way individuals react in times of stress.

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This relationship piece is often times magnified in family business matters and closely held corporations, even when there may not be a familial relationship, or long standing partnerships whose personal and business dealings have intertwined over years of operation.

Almost all such cases are fact based and require an unwinding of the contract formation, the expectations of the parties, and the customs that may have resulted over the course of years of operation.

When overlaid with the legal principles, case law and statutes that apply in most commercial cases can be approached with an eye towards settlement.

If you have read any of my prior blogs you understand the import placed on the interests, concerns, and needs of the principals involved in the dispute. Without an opportunity for these concerns to be aired, the legal frameworks and interpretations will sometimes push towards a zero sum result, moving the parties closer to litigation.

A family business matter presents the same baseline of structural issues with the family relationships fully present. One case I want to use to illustrate this complexity is a matter involving a multi-million dollar business owned by brothers. This case involved two competent men who had been in business together for decades with their father. The father started the business, while the sons grew up around the office till eventually the father divested his ownership shares to the sons, 50-50, wanting to seem fair and equitable.

The dad unfortunately did not have a crystal ball to anticipate how decisions would be made or not made when the brothers disagreed. The business owned a series of office parks outside a major metropolitan area that required intensive marketing, collections, business networking, sales, accounting, maintenance, design, renovation and basically all that is required in keeping a commercial industrial park successful. For many years after the father sold his interest to his sons, the business ran well. At some point that is still undefined, their business relationship began to sour. As this downward trend was occurring the brothers were expected to put on a happy face for the employees, their parents, their spouses, their children, and their tenants. Underneath this presented image, they each knew that the relationship had turned.

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After being selected as the mediator, and through the course of a case assessment, it became clear that the brothers were not reconciling and working out a division of responsibilities. As long as they each shared ownership, it was going to be an unacceptable situation. So the only outcome left was who would keep the business, and who would be bought out.

This dynamic put each sibling in the buyer and seller’s shoes with an important set of economic and personal financial questions to be addressed. Is the sale price based on a realistic market appraisal, and how do you effectively analyze the future cash flow and net present value to determine if the business could afford the payout? Or conversely, was the payout attractive enough to cause one or the other to walk away with a cash flow that would come close to equaling the income and benefits they were drawing to date from the business?

This lead to a challenging, but necessary, stage of negotiation to test the mettle and see who had the greater commitment to run the business, and who was willing to walk away from a business that they grew up with and was so much a part of them.

How sibling rivalry, jealousy, and history played a key role in these negotiations will not be delved into here; but suffice it say they were factors. In order to get to this point of clarity, the brothers had to come together in a way that they hadn’t in years. It led to the families, spouses and parents having to come together to explore some of the past.

Could the brothers, their attorneys, accountants, and estate planners achieve the necessary result without getting into the family history and drama? With some discussion around the family history to help understand the behaviors and dynamics we spent some limited time exploring how each of their paths as youths, students, work ethic, and family life shaped who they are. These factors cannot be ignored.

One aspect that is worth paying attention to and knowing is that a family dispute requires a careful balancing of all the dynamics discussed above.

A skilled mediator knows where to move with the parties to meet these needs and work towards a settlement. The case described above settled with one brother sharing in a sophisticated trust arrangement that involved a tax planning instrument, affording him a steady steam of income to start a new venture or sail off into the sunset.

The buying brother who, here-to-fore was feeling stifled by the other brother, retained a 100% interest in the business and was able to operate with a degree of freedom. He was able to bring his son into the business as a principal, and to see the business grow as a result.

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