Family-owned businesses are businesses, managed and controlled by two or more family members. While there is no universally accepted definition of what a family business is, the general definition means that a number of businesses can be considered as family owned.
Some examples are businesses run between two spouses, businesses run between parents and children, businesses run between siblings and even businesses run between cousins. What makes them business unique, is the relationships that characterise the family business.
Research has shown that family-owned businesses have the capacity to outperform non-family-owned businesses due to commitment to long-term goals. Longevity and legacy are a goal for many family owned businesses as they are able to give priority to long-term goals over short-term goals. Most families are in business for the long haul.
However, despite this, family-owned businesses face a number of challenges that are unique due to the family relationships. When the relationship is good the business does well. However, when the relationship is shaky, then this may negatively affect the business. They can be addressed by a family governance tool.
One challenge that family-owned businesses face is litigation risk arising out of broken family relationships. It is difficult to separate between the family relationship and the business relationship without proper structure.
This means that problems from one angle can trickle down to the other. For example, if a couple divorces, then it becomes very difficult to continue managing the business. There is, therefore, a need to manage litigation arising out family-owned businesses to ensure that the family business is shielded.
Litigation is very costly. There are very high legal fees to be paid to the lawyers who act on behalf of the business. The business may face reputational risk. In some cases, court orders like injunctions can have an adverse effect, grinding the business to a halt.
Court litigation is a long process that can take several years to conclude in Kenya. It has the capacity to destroy a family-owned business, and there are well-documented cases where prolonged litigation has caused the failure of family businesses.
How then can a family business shield itself from litigation?
There are structures known as family governance and business governance that a family-owned business can resort to, to prevent litigation. Essentially, litigation arises out of a grievance. The family business ought to have a grievance resolution mechanism, which is a good tool for preventing the escalation of disputes. The grievance mechanism and policy should be put in place, so that the family board can handle all types of family disputes.
In the event that the dispute cannot be settled internally, then the family mediation policy can be resorted to, which involves professional mediators. A professional mediator, being a licensed conflict resolution expert, is able to guide the family through the dispute. Many conflicts arise out of conflicting interests. It has been shown that once these interests are managed, disputes also resolve themselves. A mediator can guide warring family members through conflict resolution and help them sign a settlement.
In the event of any legal issues, the family business can resort to arbitration, which, unlike court, is a quicker way of settling disputes.
The secret to avoiding litigation is having in place proper grievance and dispute resolution policies for the family.
