Peaceful Resolutions

Family Business

by Ross Adams & Patrick Ring

The key to fair settlements in ownership disputes lies in assessing the future needs of the business and — specifically — the impact of various scenarios on its value and competitive position.

A BROTHER AND TWO SISTERS receive equal amounts of non-voting stock in their father’s corrugated box company after a 1980 preferred stock recapitalization. The siblings are constantly arguing at board meetings and family reunions. The brother runs the company. The sisters are passive shareholders who claim he refuses either to pay dividends or to repurchase their stock. They are locked into an illiquid investment and have found no way out.

THE FOUNDER OF A CHAIN of musical instrument stores in Southern Florida realizes his son is not as business-oriented as his daughter, who manages the stores. The son is also a profligate spender. To protect his financial future, the father puts 50 percent of the business in trust for his son, with his sister as trustee. After the father’s death, the sister controls her brother’s shares along with the 50 percent she has inherited. When she tries to restrain his spending habits, he brings a lawsuit to remove her as the trustee.

PATRICK AND PAUL, two cousins who have been the best of friends for 20 years, have built a successful business marketing a line of salsa and chili sauces. When they went into business, the two Texans did not draw up any formal agreement, vowing that they would dissolve the partnership before ever letting it come between them. Seven years later the friendship has dissolved instead, because of a running battle over the behavior and performance of one of their kids in management. The cousins want to part ways, but can’t figure out how to divide or sell the business assets without weakening the company.

EVERYONE IN A family business will recognise that these types of ownership disputes are quite common. The examples are real, though somewhat modified to protect company identities. “The mass of men lead lives of quiet desperation,” Thoreau suggested. There is perhaps no better way to describe the feelings of family members who are isolated and unable to extricate themselves from such situations without a protracted, costly legal battle.

Often what happens is that the family member running the business, perhaps on the advice of professionals, tries to buy out the dissidents or former partners with cash from the business. If he or she takes, say, $5 million in cash out of the business, however, it means that the company no longer has $5 million to reinvest in new products and technology or needed renovations. Inevitably, such a buyout will have an impact on the future value of the business.

Most attempts to resolve such conflicts do not pay sufficient attention to the needs of the business or the individual needs of the parties to the dispute. The result is that the conflict tends to escalate, and the impact of the conflict gets more serious. Typically, each party will first seek counsel from either a friend or a professional adviser, who quickly becomes an advocate for his or her position. After consulting their lawyers, one of them may be interested in buying out the other. An offer is made. Perhaps a valuation expert is called in. But frequently, the valuator is not even asked to explore the impact of various buyout options on the business itself. Instead, the dispute lands back in the laps of the lawyers. The parties may bring in a mediator (or a judge may order them to use one) to seek a compromise. The mediator may help negotiate a settlement that is acceptable, if not totally satisfying, to both parties. But rarely is an effort made to weigh the effects of the buyout on the value and competitive position of the company.

If mediation does not settle the dispute, the time has come to go to court. By now, however, positions have usually been “set in stone.” Unless one party has clearly suffered an egregious wrong, no one really wins in litigation, as lawyers are the first to admit. The parties may succeed in resolving the dispute, but money, time, and family relationships will be lost.

Our consulting firm has successfully used an approach to preventing this frustration and resolving ownership conflicts both before and after they occur. This approach brings the business into the equation, focuses the parties’ attention on reasonable options, and at the same time fosters an agreement that allows the company to remain competitive in its markets and to survive.


Disputes are rarely caused by poor business performance. Most often, they arise because individual owners perceive that their needs are not being met.

The first step in resolving ownership conflict is to understand how the conflict arose and why it has not already been resolved. If the problem is one of miscommunication, for example, it may be settled simply by getting the parties together in the same room to talk. But frequently, the concerns go deeper than originally thought, and involve fundamental needs that are not being met. Passive shareholders may want more dividends. A parent in one branch of the family has been lobbying for a job for a son or daughter but gets resistance from the in-group of managers who favor their own branch. Younger shareholders want cash to pursue their own career interests, but the company lacks funds to redeem their shares.

The objective of the analysis is to identify the unmet needs of both the owners and the business, and to begin a process of bringing the two into balance so that a viable settlement can be achieved. Increasingly, psychologists with experience in family business issues and university-based family business centers are being asked to facilitate these discussions.

While the parties to a dispute initially say they are determined to prevail, they usually have a bottom-line position. Most of them simply want to walk away feeling they have been treated fairly. We emphasize “most” because a few or our clients have, in fact, shown little interest in fairness. In one of our memorable failures, the two clients dismissed the proposed solution because it failed to inflict sufficient pain on the other.

Often the controversy is based on a misperception. For an illustration, think back to our first case of the two sisters who were fighting with their older brother. The sisters argued that they had few liquid assets. While the brother in charge of the business paid himself a substantial salary, they had to live on other income. For the most part, the two “outsiders” knew little about the business beyond what their brother was willing to share with them.

Our analysis provided an independent evaluation of the firm’s current performance and growth potential, and an explanation of what shareholders could expect to receive from the sale of some or all of the company’s assets, either then or in the future. As it turned out, however, the sisters were not as worried about the lack of income or liquidity as they were about some of the older brother’s ventures. They feared that the risk-taking brother they had grown up with was once again taking big risks — this time with their money.

The analysis calmed their fears. We concluded that the brother’s investments were prudent, and performing rather well to boot. With that discovery, the siblings put down their weapons and made peace. The crisis was resolved by a combination of asset sales, a leveraged stock repurchase, and the formation of a self-liquidating family partnership.


The needs of a business are relatively simple. A business needs management and capital. The job of management is to deploy capital wisely and to ensure that the business is competitive. The needs of the owners are more complicated, and in many cases, conflict with the needs of the business. The principal reason for the complication is that investments in private companies are not liquid. Given liquidity, shareholders who disagree with the way a firm is being run, or with its dividend policy, or who simply want to put money elsewhere, can sell shares and quickly meet their objectives.

In a privately owned company, there are many ways to create an income stream or a distribution of capital. The impact on the remaining shareholders, though, is almost always substantially greater than it would be in a publicly traded firm. For this reason, it becomes critically important for the shareholders to come to the table as a group with someone qualified to serve as an independent and unbiased guide to the process. Whether the end result is wholly satisfactory to any one constituency is relatively unimportant. The critical factor in a resolution is that all constituencies feel that they have been treated fairly.

To develop options for the family or shareholder group’s consideration, we try to get them to look at the business from the perspective of a securities analyst, to examine it as they would any other investment. Then we gather economic data on the company and its industry (as an analyst would), from which we form an independent opinion about the competitive position of the business, its performance and future prospects compared with peers in its industry group.

Out of this exercise, a number of things about the company may become apparent. On the one hand, it may be that the business, as currently owned and operated, is no longer competitive. This could suggest that the owners have three choices: 1) get competitive (quickly); 2) get out of the business (quietly), or; 3) sit back and watch the business deteriorate (painfully).

If the company is poised for a rapid expansion, on the other hand, it will obviously have to reinvest its profits, and then some. The analysis might also point to mixed results within the company, whereby one profitable business or product is subsidizing other, less attractive ones. In such cases, the less profitable businesses might be sold in order to raise cash to buy out dissident shareholders or set up a stock redemption fund.

If the business is to grow, a consensus must be built around expected cash flows and risk, and by extension, a central notion of value. We base our analysis on estimates for a firm’s revenue growth potential, its normalized profitability (adjusted, if necessary, for family accounting peculiarities), and the level of investment required. This analysis sets the stage for considering alternative ways to meet shareholder objectives.


With a clearer understanding of why the conflict exists and what the expectations are for the business, the parties to the dispute have a basis for generating an action plan for changing the ownership structure. More often than not, this is done by an iterative process, in which various options are considered one at a time and either discarded or improved upon until the parties can agree.

In family owned companies, it is usually far easier to reach a consensus on business issues than on the emotional issues. By valuing the business and demonstrating the impact of alternative strategies on the magnitude and timing of available cash flows, the family members develop realistic scenarios. Gradually a consensus emerges on what’s best for its shareholders.

For example, in many of the businesses we work with, current profits explain less than half the firm’s value. The balance of the value is attributable to expected growth in the future. A growth company that is reinvesting much of its profit in support of its growth and has to borrow in the early years to fund the shortfall will still often be worth more than a mature business that produces a stable return, requires no investment, and can therefore pay out all of its earnings to its owners.

For most private companies, capital is a scarce commodity. If capital is used to cash out exiting shareholders rather than for reinvestment, that will reduce the company’s growth-option value and, consequently, the value of the firm. Thus, when owners are carving up the pie, they must realize that the size of their slice depends on when and how they choose to take it.


The next question is how to allocate the expected returns among the parties fairly, without undermining the business. The owners’ objectives must be categorized and qualified-and they must be reasonable. In many cases, the first two objectives can be met, but the third is elusive.

In one recent case, we were working with four equal owners of a business which, as then operated, had a value of approximately $20 million. At the outset of the engagement, it was clear that the owners were not getting along. It was unclear what any of the partners would settle for, but a lot depended on establishing a price for the business.

First, we appraised the business as it was then owned and operated. We then made various adjustments to this model, based on market and industry data and alternative scenarios. This permitted the owners to compare operating, investment, and financing alternatives. For example, the most clearly disaffected of the owners argued, probably correctly, that the industry leader would be willing to pay more than $20 million for the company. However, two of his co-owners, who together controlled 50 percent of the stock, did not want to sell. Accordingly, that option was tabled.

What, then, was the first shareholder’s next-best option? He could exit relatively easily if the company borrowed $5 million from the bank to redeem his stock. The bank was willing to provide the money, but would not risk loaning more than that for a buyout if any of the other shareholders also wanted to exit. At that point, the wishes of a second shareholder become a significant unknown. If that shareholder wanted to be bought out, too, an investor would have to be found to fund the transaction.

Strategic investors were not interested in investing unless they could obtain an option to buy the remainder of the company. Each of the financial investors who was contacted, moreover, had a return requirement of more than 25 percent, which exceeded the returns being generated by the company.

The questions continued to flow. How should these choices be viewed or compared? What were the other owners likely to do? Remember that the size of the pie will vary with investment in the business (the growth option). A withdraw of capital today might reduce the value of the firm by more than the amount of capital withdrawn. A substitution of new capital for old, from either a bank or a new investor, might result in an unbalanced allocation of returns between the new investor and the remaining investors.

Here we showed that with $5 million less capital available for investment, the value of the business would shrink to $12 million. Buying one brother out at $5 million would leave each remaining shareholder with only $4 million of value. When this was understood, the brothers were able to reach a compromise figure of between $4 million and $5 million that was fair to all concerned. To avoid similar disputes from occurring, moreover, the three remaining shareholders took the occasion to reach clearer agreements on future stock transfers in their estate and succession plans.


The techniques involved in ownership conflict resolution must balance an understanding of the business with the requirements of the capital markets and the needs and objectives of the owners. Financial modeling can answer some key questions, but only when combined with scenario planning does it emerge as a powerful problem-solving mechanism. A closely held business is an immensely flexible vehicle which, in most situations, can be restructured to meet the divergent needs of its owners.

Win-lose mindsets tend to focus on dramatic outcomes. Within a family business, smaller, practical steps are possible, and usually far more desirable. Among the strategies that can be employed to resolve disputes are: the split-off of a business unit or a piece of real estate; the gradual creation of a fund for share repurchases; a family leveraged buyout; or the creation of a family limited partnership to reallocate returns.

A neutral party obviously can be helpful in articulating the impact of various strategies on the business and to the parties in an ownership dispute. A knowledgeable facilitator is particularly important when some owners are involved in the day-to-day management of the business and others are not. Very often the “outsiders” have far less business experience than the “insiders.” The outsiders may even believe the insiders are withholding information from them. The presence of an objective third party who listens to the outsiders’ views and answers their questions helps to build trust and confidence in the process.

Similarly, if outside financing is essential to resolving the dispute, the parties may want an unbiased professional to represent them in discussions with lenders, investors, and other financing sources. Finally, when the elements of a plan begin to take shape, each of the parties should understand the tax impact of the resolution. While this may require them to share some confidential information, it is nonetheless essential to consider the tax consequences of any agreement to resolve the dispute.


By this point, you may have concluded that the process we’ve described is too complicated or simply too demanding to pursue. But consider the alternatives. Without a thorough exploration of possible scenarios, the choice is between the maintenance of the status quo or an escalation of the conflict.

So long as the needs of the business and the needs of its owners can be met, conflict can in most cases be avoided. Most of the time it can be prevented by means of good ownership planning. One mother, for example, told us that she wanted her husband to arrange his estate so that no shares in the business were left in her name. Their children would then own and run the business. She didn’t want to depend upon the children for income or to get into business arguments with them. “They have worked well with their father,” she said, “but I don’t want to be in business with my children, and I don’t want to have to serve as a mediator in their fights.”

Another business owner agreed to forego investing in his company for a time-in effect, letting the business shrink in size-in order to finance a buyout of his cousins. He said about the settlement: “Life is too short. The business will be smaller, but I’ve grown it before and I can grow it again, and, this time, the risks and the rewards will be mine.”

When conflicts do surface in a family business, there are usually alternatives to costly court battles and the bitter feelings that are left in their wake. Life is too short not to consider those alternatives.