Years ago, I asked my late father, an architect, to design a house for me. This is something I’d dreamed of since I was young, and when he got sick, I realised I needed to get moving if I wanted to make this dream a reality. At the time, buying land and building a house on my own simply wasn’t something I could manage. So, my friend Catherine and I bought a piece of land together, with the idea that my father would design the house and her husband would build it.

My father passed away before he ever got the chance to draw up the plans for me.

Deciding what’s important

Fast forward a few years later, and the house was eventually built. With the land and property sorted out, Catherine and I had to decide on a way forward. We agreed that our friendship would always come first, and that if the house ever put that at risk, we’d sell it.

Our resolution has definitely been tested since, none more so than when we ended up with non-paying renters. Grace periods, broken promises, difficult lawyers, legal fees, navigating best options out of a variety of bad options, we dealt with it all. We found a way through, learned how to do things better next time, and came out the other side with the friendship still intact.

What made it work

Buying a house together isn’t strictly a business, but the same principle applies in every family or friend partnership I mediate: closeness doesn’t lower the stakes, it raises them.

That’s usually what’s missing when these businesses fall apart. Nobody puts an agreement in place before it’s needed, because everyone assumes the closeness itself is enough.

A double-edged sword

Globally, families own and manage the majority of businesses. The trust that already exists between family members has tremendous benefits such as faster decision-making and less time spent earning the trust that strangers going into business together would otherwise have to build from scratch.

However, trust doesn’t only make things easier, it also raises what’s at stake if things go wrong. In family businesses, family roles, ownership, and business roles overlap in ways they don’t in other partnerships, so a disagreement that would stay contained anywhere else can threaten the relationship and the business at the same time.

Playing the long game

Businesses typically fall apart when partners haven’t built in a way to disagree safely, and generational succession is the clearest example of that gap. Stellenbosch University researchers found that non-family businesses in South Africa are 2.7 times more likely than family businesses to have a formal, written strategic plan. They also put the average lifespan of a family business at around 24 years, roughly as long as the founder stays in charge.

What’s often missing is the plan and structure other businesses build in by default.

The same gap that sinks a succession can just as easily sink two friends splitting equity, or a family running a business together with nothing written down.

Building the advantage on purpose

The clause Catherine and I built into our agreement (naming exactly when we’d walk away), is the part most people skip when they draft a co-ownership or shareholder agreement in family businesses.

Naming the trigger tells you when to act, but it doesn’t tell you how, and that’s a separate clause most agreements leave out entirely. These are worth putting in writing, no matter what kind of agreement you’re using:

• A clear conflict resolution clause. Keep away from the standard Magistrates’/High Court or “an arbitrator with 10 years’ experience” clauses, and include options for escalation instead.
• Start with an option for parties to resolve the matter between themselves, within a certain time frame. Failing which, get a mediator to help resolve the conflict, find a solution that works for the parties, and protect the relationships that are vital for the continuation of success in the business. If possible, select a mediator beforehand, or identify someone who can recommend a mediator.
• If the mediation fails within an agreed time period, provide an option for escalation to arbitration or court if necessary. In a business where relationships are important (I would argue all), leave litigation as an absolute last resort.

The bottom line

Businesses with friends or family do not fall apart because there is a personal relationship. They fall apart because normal business practices are neglected when friends and family are involved, or because no clear conflict management processes are agreed upon.

Embrace the benefits of doing business with someone you trust, without neglecting to put in place what is necessary to protect that relationship and the benefit it brings to the organisation.

If you’d like help putting this into your own agreement, get in touch, I’d love to help.