Resolve Family Business Disputes through Mediation

How to Use Mediation to Resolve Family Business Disputes

Resolving family business disputes amicably through mediation can help preserve relationships and ensure the continued success of the business. Here are steps to follow:

Resolving family business disputes through mediation allows for a collaborative and amicable approach, promoting understanding and preserving family relationships while safeguarding the long-term success of the business.

Being in business with family members involves some unique dynamics that are not present with other types of business arrangements. Sometimes, issues that are totally unrelated to the business can become disruptive, such as personal/relational conflicts, and some of these may go back several years or even decades. 

During the COVID-19 crisis, many family members have been cooped up together for an extended period of time, causing many disputes that may have been simmering underneath the surface to boil over. And in some cases, the family business has also had to close temporarily, adding more stress to the situation. 

Family business disputes that are triggered by issues that blow up during the heat of the moment can cause long-term damage, possibly even leading to the closure of the business. And oftentimes, it is difficult for family members who are so close to the situation to resolve these matters among themselves. Unfortunately, the emotions and stress created by the unprecedented times we are living in could cause the owners of a family business to call it quits, even though they might still have a viable business that could continue on and be passed down to future generations.

How Mediation Can Help Family-Owned Businesses that are Facing Difficult Times: Whether it is a conflict between owners that poses an existential threat to the family business or difficulty figuring out how to navigate the uncharted waters ahead as we look forward to the end of the coronavirus pandemic, owners can benefit greatly by bringing in an outside perspective. 

A mediator, for example, can help resolve disputes between owners, and they can also help with issues the business may have with outside parties; such as suppliers, vendors, lessors, or other associates for which they may need to renegotiate their existing agreements. Mediators can also help create a more formal operating agreement for the business, one which many family businesses have realized that they need since COVID-19 started. 

Advantages of Mediation in a Family Business Dispute

Here are some of the advantages that mediation offers for family businesses with issues that need to be resolved.

Affordability: Mediation is cost-effective not only as an alternative to bringing a dispute to court, but also as a preventative measure to keep major disputes from arising in the first place. In most cases, business owners can settle important issues in just a few sessions or less, saving them untold amounts of time and money.

Direct Participant Involvement: The mediation process is entirely voluntary, and no agreement can be valid unless all participants agree. Although the mediator facilitates the sessions, the participants are the ones that ultimately decide how the issues are resolved. This allows participants to take more ownership of whatever is agreed upon, making them more likely to adhere to it.

o Confidentiality: Mediation sessions are private and confidential, and everything that is discussed stays between the participants and the mediator. This allows participants to speak more freely without any concern that what is said will become part of a public record.

o Flexible Scheduling: With mediation, you do not have to worry about any court schedule, which is of particular concern lately with the courts being closed for all but emergency proceedings. Sessions can be conducted even while the COVID-19 restrictions are still in place, and they can be scheduled at whatever time is most convenient for participants.

o Contactless Remote Sessions: Mediation can be conducted while adhering to social distancing guidelines. As long as you have a telephone or internet connection, business owners can participate in virtual mediation sessions from any physical location.

Mediation in action, an example.

In a successful family business, a medical equipment company founded by two brothers, only one member of the second generation (the older brother’s daughter) chose to enter the firm. Her brother pursued an academic career, and their cousin, the only son of the younger founding brother, went to work in the telecommunications practice of a prestigious consulting firm. After several years, the daughter became CFO. Her father had retired (retaining his interest in the business), and she reported to her uncle, the CEO. Problems developed when the cousin was laid off by the consulting firm and wanted to join the family business—as a vice president with a seat on the management committee, and compensation equal to his last salary (which would be 20% higher than the daughter’s compensation). The daughter expressed concern about his lack of experience in their industry, and discreet indignation about his compensation requirements. Worried about being marginalized if her uncle and cousin were both active in the company, she went to her father and he entered the discussions.

Things escalated. The disagreement over how to accommodate the cousin became an unspoken but seriously disruptive conflict. The unwillingness to communicate about this issue became a refusal to communicate about other management issues. The three vice presidents, who were not family members, felt hamstrung; key processes and initiatives became compromised. The founding brothers, who had always successfully worked together, were each secretly consulting attorneys. Family dinners became a thing of the past. Finally, after several months, the vice president of human resources urged the brothers and their two children to try mediation for the sake of the family enterprise.

The mediator explained that, under her guidance, they would do the difficult work of devising a solution. Sometimes she had all of them at the table, and sometimes she spoke with one or two of them privately. (In situations where suspicions run high, mediators will often make sure to balance their separate communications, giving each party equal individual conference time.) She helped the parties recognize and cope with the frustrations and emotions that fueled the conflict—much of which began during long ago family interactions—and to focus on the future of the business.

At the end of five hours, the recriminations and allusions to legal action had ceased. The four parties agreed that the cousin would come into the business at the same compensation as the daughter but would have a one-year probation/learning period during which time he would report to a VP, while the daughter would continue to report to her CEO uncle. The cousin could attend management committee meetings by invitation, but would not have a vote. At the end of one year, the management committee would review the cousin’s performance and decide as a group about promotion. In addition, the CEO committed to keep both his son and his niece in his communications loop, simultaneously, and to respect normal management communication channels. Finally, they agreed that the CEO, his son, and his niece would meet once a week for at least the following four weeks to confirm that their hard-won arrangement was working—and the retired brother agreed not to intervene. Their resolution worked because they had devised it themselves and because it established a sound basis for going forward. It was good for the business, and it was good for the family.

A longstanding or valuable relationship might be at stake in a dispute with an outside party. It is always at stake when conflict erupts within a family business. A skilled mediator is often the best option to help family business members resolve the problem at hand and to avoid repeating old, counterproductive patterns in the future.

Neutrals' Capability at Equa.