Mediation and the Family Business

Keeping the family business intact over several generations is a difficult task. Only 30 percent of family businesses survive the transition from the first to the second generation and only 30 percent of those survive to the third generation. Conflict at the owner or family level is one of the principal reasons for the high failure rate.

As Tolstoy said: "Happy families are all alike; every unhappy family is unhappy in its own way." Tolstoy is right — we cannot generalize as to the nature of family business conflict; however the source of the conflict is easier to spot. Looking at the different functions of the family and the business illustrate how different each system is. The family is based upon nurture, emotional bonds and supporting all family members. The business is based upon accountability, profits, merit and performance. It is easy to see the inherent conflicts between the two systems.

The conflicts that arise between the family system and the business system are not irresolvable but its takes work, advance planning and open communication. Trying to resolve 30 years of unhappiness at the founder's funeral is rarely successful.

In our society it is not unusual when a conflict develops that the first person called is the lawyer. Traditionally, the only tool for lawyers to resolve disputes, after negotiations have broken down, is to file a lawsuit. Litigation, however, is a terrible way to resolve a family business dispute. It is incredibly expensive, it is public and it causes irreparable injury to the relationships of the litigants. In many cases when a family dispute goes to court, the family members become estranged — forever. Furthermore, the judicial system is ill equipped to deal with a family business dispute. A judge cannot order the family members to get along in order to run the business.

For these reasons, I strongly recommend that all family business disputes be mediated. First and maybe most importantly mediation is confidential. Public disputes are devastating to both the family and the business. Mediation also allows family members to minimize legal costs and control the decision making process. It is the most rapid process available for a full and final resolution of disputes. Unlike litigation, which can take years to get to court, mediation can occur at any point in time and can usually be completed in one day. Anyone who has been involved in business litigation knows how difficult it is to run the business in the middle of a lawsuit.

Mediation is non-binding so that the family, not a judge, maintains control over the dispute. The parties are able to craft their own resolution so that it can include terms that are not achievable in litigation. For example, the parties could craft a detailed management and corporate governance structure for the business that could never be crafted in an adversarial process.

The mediator has no power to "order" a result, and therefore the ex-parte rules applicable to litigation (i.e., neither side can communicate with the judge without the other side present) do not apply. This allows the parties to speak individually to the mediator, which creates confidence and comfort with the mediator and the process. It also allows the parties to explain their position without the usual posturing that occurs in litigation.

More often than not, family business disputes result in the business failing or being sold and the family being torn apart. Obviously, avoiding such disputes altogether is the preferred route. However when that fails, mediation should always be strongly considered before resorting to any other dispute resolution process.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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