Home discomforts – a cautionary tale about family business

Categories: Disputes

Why keeping-it-in-the-family can have unwanted repercussions

Family businesses are incredibly popular in the UK. With more than four million family-run enterprises in existence, they make up almost 90% of all private sector firms in the country.

The appeal of forming a family business is easy to understand: you know and trust one another, and feel you have the same interests at heart.

It’s an appealing scenario and in many cases, this optimistic approach proves fully justified. The close family ties can mean that you are better able to manage the inevitable challenges and bumps in the road that can test any company. However, if things do go wrong, then it’s possible that that very familiarity can complicate matters further and create additional tension between the parties.

This is partly due to the personal nature of the relationship

If you encounter conflict with a work colleague, then at least you can often switch off and speak to friends or family when you go home. But conflict with someone who is also a close relative is much harder to leave behind.

In addition, as lawyers, we often find that family business arrangements leave much to be desired. Unlike purely professional relationships, there is often an assumption that ‘nothing will go wrong‘. This can lead to corners being cut when documenting key decisions and agreements. That’s all very well when things are looking rosy – but should difficulties arise, these loose agreements can come back to haunt you.

An unforeseen dispute

At ORJ Law, we recently concluded a complex case involving two siblings who ran a successful family business together. Over the years, one of them had taken out an interest-free loan from the business. This is all quite normal and above-board. However, when they decided to leave the business, the status of the loan and the outstanding balance was disputed.

Due to the family nature of the business, there was no formal loan agreement in place. So what could, and should, have been a straightforward matter of record became a source of disagreement and acrimony.

This conflict was compounded by a dispute over the company valuation when one party sought to leave.  Again, this might have been avoided had all the necessary documentation been in place, rather than taking shortcuts because ‘we’re all in it together as a family’.

In this case, thanks in no small measure to our expertise in these complex legal matters, we helped achieve a settlement that proved acceptable to all parties. However, disputes involving family members can often escalate into costly court proceedings more readily than other, less personal business disputes.

The moral of this story is that family firm or not, it always pays to conduct your commercial affairs in a fully business-like, disciplined way. Then any future differences are much easier to unpick and reach a reasonable outcome.

Blood may be thicker than water but, in the cold light of day, it can’t help you cut corners in the eyes of the law.

Michael Smyth is a solicitor with ORJ Law, specialising in litigation, construction and insolvency matters. To speak to Mike or one of his colleagues call ORJ on 01785 223440