Internal conflict is considered one of the greatest impediments to success and continuity in the business world. In family businesses this reality is amplified by the emotions present as a result of personal relationships, allowing added complexity within both conflict deterrence and resolution. Similar to risk related to any other type of business however, conflicts can be managed, mitigated, and in most cases even prevented. Miguel Cases and Daniel Tienda, partners of Cases & Lacambra, a boutique law firm specialising in private clients and family offices, describe three family businesses and the conflicts they endured, the lessons learned and the preventive tools necessary to avoid these obstacles all together.

Conflict in the family business

Conflict within a family-owned business is usually much more complicated to deal with than in non-family corporations. Family business conflicts usually involve personal feelings and complications borne within the family and are thus rendered increasingly more unpredictable. As emotions and relationships become involved, the risk of making uninformed decisions increases and employees and stakeholders suffer the consequences of an internal family conflict that can ultimately lead to the decline of the business.

In order to underline the importance of preventing clashes within a family business, we present the following three cases:

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Case 1: Husa Hotels: Crisis triggers a latent conflict

Husa Hotels is a major Spanish hotel operator that represents a strong and lasting tradition of family entrepreneurship. The company was founded at the beginning of the 20th century by a member of the Gaspart family. During the Spanish Civil War in the 1930s, the family lost control of the company. In the 1960s, current patriarch of Husa Juan Gaspart Solves started building a restaurant and hotel conglomerate that enabled him in 1975 to buy back Husa from the Botin family (the controlling family of the financial conglomerate Santander). Gaspart soon stood atop a successful business that by 2007 controlled more than 140 hotels, 60 related businesses (restaurants, catering services), had thousands of employees and a turnover exceeding €300 million.

Juan Gaspart Solves has four descendants that are currently part of the second generation of Husa ownership. Guillermo Gaspart is the youngest son of the second generation and also a member of the Spanish Institute of Family Business (IEF), former chairman of its young members division and a member of the international organisation Family Business Network (FBN). With Guillermo’s assistance, the family adopted measures in order to avoid conflict, such as establishing a family protocol and defining the applicable stakes of the family members. A family council comprised of members over the age of 18 aimed at addressing important family matters as well as the inclusion of annual meetings rounded out the procedures enforced to help more smoothly operate the business.

Family protocols and patriarchal leadership worked swimmingly until 2008, when turmoil in the hotel sector began and the family had to apply more effort to bring theory into practice.

During this strenuous period the personality traits of each family member significantly influenced the transitional development of Husa as a company. The most prominent personality was the patriarch’s, who had the mind-set of an authoritative founder bearing a desire to supervise every single detail; focusing on minutiae as minor as the change of pillows in the hotel’s rooms. There was also the second generation and its range of personalities and predetermined roles:

  1. The older sister, protective of the family’s core values, possessing a distributive negotiation style.
  2. The oldest male descendant, the natural successor, preselected to run the company and to execute the succession.
  3. The second brother, educated to develop a strong operational activity inside the group.
  4. The youngest brother, a strategic visionary and planner that supports the internationalisation and diversification of the business.
  5. Establishing effective communication channels between the family members so they can express their opinions that may differ from those expressed in the patriarch’s presence.
  6. Implementing and updating the family protocols to allow for an operational process of conflict resolution.
  7. Ring fencing and the segregation of family and business assets.
  8. Establishing boundaries between family and business in order to avoid remedying family needs with the use of business resources.
  9. Creating a family office that supports entrepreneurship and the satisfaction of family member expectations.
  10. Implementing a professional system of external management.
  11. Dissolving and liquidating the real estate company by assuming and refinancing its debt.
  12. Creating a family office managed by an external professional (the mandate of the manager was to diversify the portfolio of investments of the family from the pharmaceutical sector while gaining exposure to other markets by taking positions in liquid financial assets).
  13. Establishing a yearly meeting of the family council.
  14. Creating a philanthropic foundation managed by the second generation’s female members so that they also were involved in the family business.
  15. To return to the main business focus of the company by disinvesting in non-typical activities while investing in the professionalisation and internationalisation of the company.
  16. the constant and open communication amongst the members of the family which allowed all involved to recognise the company was facing a problem,
  17. the similar educational standards of the sons which allowed them to share similar values,
  18. the common and deep loyalty to the institution of the family,
  19. the recognition of a family legacy that needed to be preserved based on the patriarch’s respected stance in the eyes of his children and the business world at large and
  20. the pursuance of external and professional advice.
  21. The family business has to be professionalised.
  22. A co-presidency only works for a transitional period of time.
  23. Incorporation of external professionals in some key positions should not happen too late.
  24. The roles of the family members have to be clearly defined and separate from each other, avoiding any form of overlap.

When revenues declined alongside the presence of a fading leadership and the subsequent lack of a valid successor, the different members of the family began to think of running their own businesses.

After several years spent discussing the future of the company, today Husa is facing a profound task of restructuring the business under a professionalisation programme while also evaluating the possibility of allowing investors aboard.

While conflict in Husa appears to be under a watchful eye and thus limited, effective measures must be taken to prevent clashes in the future. They include:

  1. Establishing effective communication channels between the family members so they can express their opinions that may differ from those expressed in the patriarch’s presence.
  2. Implementing and updating the family protocols to allow for an operational process of conflict resolution.
  3. Ring fencing and the segregation of family and business assets.
  4. Establishing boundaries between family and business in order to avoid remedying family needs with the use of business resources.
  5. Creating a family office that supports entrepreneurship and the satisfaction of family member expectations.
  6. Implementing a professional system of external management

Case 2: Pharmaceutical industry conglomerate tackles the task of succeeding the founder

Olegario Soldevila is a 4th generation member of the Soldevila family, owners of the Majestic Group, and members of the board of the IEF. Soldevila is also a director of the prestigious investment services and advisory firm Arcano Investment Advisors, which specialises in advising family owned companies. Soldevila recently was tasked with counselling a leading Spanish family-owned pharmaceutical company.

The company, founded by a charismatic patriarch in the middle of the 20th century, today possesses a turnover exceeding €1 billion and employs more than 4,000 people. The head of the family birthed four descendants; two sons and two daughters. He appointed his eldest son as his successor and provided him with a top-notch education, yet whilst under the shadow of the patriarch he did not develop substantial management experience. The patriarch, a self-made man with a strong personality and a remarkably intuitive business decision making acumen, meanwhile made a series of risky decisions for the business when he was in his late 70s.

The youngest son expressed his desire to participate in the family business by creating a real estate development company during what later became the Spanish real estate bubble. His project was supported by the patriarch who felt a debt towards his younger son. The latter soon started to develop important real estate projects that gained easy access to credit due to the support of the family business despite the firm’s inexperience with accruing debt.

In 2007 the perfect storm arrived. The family business initially faced difficulties when the demand in their sector fell dramatically just as key investments were being executed. Secondly the real estate market crumbled, compromising the family business due to its commitments in the housing market. Finally, the patriarch suddenly passed away and succession planning was thrust upon the family.

The second generation was now suddenly faced with actively participating in the family business. At such a crucial turning point, the family decided to ask for professional advice to help make key decisions such as:

  1. Dissolving and liquidating the real estate company by assuming and refinancing its debt.
  2. Creating a family office managed by an external professional (the mandate of the manager was to diversify the portfolio of investments of the family from the pharmaceutical sector while gaining exposure to other markets by taking positions in liquid financial assets).
  3. Establishing a yearly meeting of the family council.
  4. Creating a philanthropic foundation managed by the second generation’s female members so that they also were involved in the family business.
  5. To return to the main business focus of the company by disinvesting in non-typical activities while investing in the professionalisation and internationalisation of the company.

Though the conflict initially seemed to be unavoidable, the ability to activate several measures of austerity prevented an escalation and allowed the company to survive the succession and the difficulties they were facing. Soldevila’s experience underlines certain elements as contributors to the successful outcome of the family business, namely:

  1. The constant and open communication amongst the members of the family which allowed all involved to recognise the company was facing a problem,
  2. The similar educational standards of the sons which allowed them to share similar values,
  3. The common and deep loyalty to the institution of the family,
  4. The recognition of a family legacy that needed to be preserved based on the patriarch’s respected stance in the eyes of his children and the business world at large and
  5. The pursuance of external and professional advice.

Conflict in the Family Busines - 3 Cases to Ponder

Case 3: Pyrenees Group: Systemic risk behind a family business conflict

Pyrenees Group was the first business conglomerate in the Principality of Andorra. Andorra, a small country surrounded by mountains, is a fast growing economy powered by tourism and financial services. The Group owned and managed department stores and supermarkets, distributed cars and was active in the food and beverage, oil & gas, insurance and finance industries. The Group oversaw over 1,700 direct employees in addition to 20,000 indirect employees, which represented approximately 20% of the Andorran GDP.

The Pyrenees Group, founded in the 1930s was owned in equal parts by the second generation Pérez brothers. Conflict between the two siblings ended with the split of the family business in 2010.

According to Cristian Perez, CEO of the family office Georges Kapital and former CEO and President of the Executive Committee of the Pyrenees Group: “Having two co-presidents was one of the main mistakes that were made.”

Tension began with the potential entrance of a 3rd generation as well as disagreements between the brothers. These strains expanded throughout the company and eventually reached the executive committee and the company’s management structure. This resulted in the company’s employees choosing a different brother with which to side and thus created an irreversible fracture within the Group.

The family protocol showed the weaknesses of the structure as it was not updated and its use as a last option for resolution was interpreted as a failing of dialogue and accelerated conflict. The family also went through a reconciliation programme which proved futile. When the hiring of external advisors was implemented the situation was already irretrievably lost.

In the middle of the battle, the banks were reluctant to continue offering financial support to the company. There was a threat to bring the company’s disputes into court, which would have meant not only the total paralysis of the company, but also a real threat to the economy of the country. The prime minister of Andorra and head of the government acted as mediator and recommended the appointment of a conciliator to protect the interest of the family and Andorra as a nation.

The conciliator, together with the family legal and financial advisors, agreed to split the family business into two separate parts: one representing the monetarily productive side of the business and the other representing the family heritage assets. One lot represented the will to proceed as an active entity of the business structure and the other the will to move to a more dividend oriented business structure. One of the brothers was asked to form the lots and the other to choose one of them. The new structure was settled through a mechanism establishing that the process was not assailable and giving powers to the conciliator to take final decisions when the parties failed to reach an understanding in matters related to the execution of the agreement.

Says Christian Pérez, “The execution of the agreed deal was not easy. We were having meetings together with the conciliator and the external advisors of both parties 24 hours around the clock until the deal was signed. The speed of the execution was a key factor in avoiding any changes to the direction of the process that could have arisen due to the strong tensions between the family members.”

Perez furthermore underlines some lessons to be learnt from his experience, on top of the ones already mentioned above:

  1. The family business has to be professionalised.
  2. A co-presidency only works for a transitional period of time.
  3. Incorporation of external professionals in some key positions should not happen too late.
  4. The roles of the family members have to be clearly defined and separate from each other, avoiding any form of overlap.

Guides to Conflict Prevention and Action

The three cases above amply demonstrate the detrimental effects of internal family conflicts on businesses. Based on the learning points of these cases we finally present two separate tools: One for family businesses who wish to prevent conflict and another that emphasises the steps to take once conflict has already erupted. Families are advised to use these guidelines as tools in order to mitigate the effects of potential and existing conflicts.

Tharawat Magazine, Issue 21, 2014

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