From “rags to riches” and back again: addressing root causes of conflict in family enterprises

It is often said that family businesses can achieve outstanding success in the first generation, but can just as easily experience decline by the third generation. Many of these businesses flourish under the clear vision and entrepreneurial drive of their founders, yet fail to transition successfully to the second or third generation. While some of these failures stem from external market forces or business models that become obsolete, dynamic families can frequently adapt, pivot or redirect their skills to new industries or opportunities.

Internal conflict is far more difficult to overcome. Once entrenched, tensions between family members are among the most common and most destructive risks to the longevity of family businesses and family offices.

Informational asymmetry

One recurring root cause of internal conflict in family enterprises — whether operating businesses or family offices — is the lack of transparency surrounding critical discussions and decision‑making.

Opaqueness can easily foster rumors, which, in turn, can generate a wide range of negative emotions among family members, regardless of whether they were involved in the original discussions. Mistrust grows quickly where individuals believe that information is being withheld or selectively shared.

If opaqueness generates mistrust, an important question follows: Could family enterprises adopt a model of “radical candor,” where key deliberations are conducted openly, documented and — subject to compliance with data protection and privacy requirements — accessible to all relevant stakeholders?

Enhanced transparency is not a panacea, but it can significantly reduce suspicion, manage expectations and ensure that all parties understand both the rationale for decisions and the processes that lead to them.

Economic distortions

Another significant risk for private enterprises arises from the distortion of economic metrics. Unlike public companies, private family businesses and family offices are often shielded from the rigorous key performance indicators and market scrutiny that listed companies face.

Over time, this insulation can create blind spots.

One potential approach could be to intentionally introduce established business frameworks to assess efficiency, return on investment and the economic rationale for maintaining various functions in‑house versus outsourcing them, as well as how these functions are performing.

For example, many family offices already benchmark external service providers for fees and returns. Extending this benchmarking to internal services could allow families to obtain a clearer picture of performance, costs and opportunities for improvement.

A more ambitious alternative would be to apply — voluntarily — the disclosure and governance standards applicable to public companies to a private family business or family office. While this may seem onerous, the resulting transparency can provide all stakeholders with a uniform level of information, thereby reducing misunderstandings and eliminating another source of opaqueness that fuels conflict.

 Historical legacy

A further and often underestimated factor of family disputes is the weight of historical relationships. Many conflicts in family enterprises can be traced, at least indirectly, to childhood experiences, unresolved emotional dynamics or long‑standing patterns of interaction.

Although it is not always possible to resolve these deep‑rooted issues entirely, families can create processes that help mitigate their impact on business interactions.

Helpful techniques may include the following:

1. Circulating agendas in advance to avoid the perception of strategic ambushes or “surprise discussions”

2. Instituting a cooling‑off period that discourages immediate written communications following contentious exchanges

3. Engaging neutral facilitators or mediators during meetings where particularly sensitive issues will be addressed

4. Establishing clear meeting protocols, including time limits, speaking turns and structured decision‑making frameworks

5. Creating formal governance structures (family councils, boards and investment committees) that channel discussions through institutional processes rather than personal dynamics

These steps cannot erase emotional history, but they can create conditions that allow for productive dialogue despite it.

Concluding thoughts

Family enterprises are among the world’s most resilient and innovative institutions, but they are also uniquely exposed to personal, emotional and relational risks. Many of these risks can be mitigated — although not fully eliminated — if families adopt transparent communication practices, rigorous economic assessment frameworks and structured governance processes.

- The writer is Counsel, Baker McKenzie Dubai