Fair Isn't Equal: Steps for an Effective Family Business Transition

Let’s take a little poll: 

If you have siblings, when you were a child did you make sure that whatever your sibling got you received the same thing? 

Speaking from personal experience as the youngest of four daughters, if my oldest sister got 6 M&Ms as a treat while my mom was baking cookies, you could bet my other sisters and I were in the kitchen within a second. Watching and waiting as our mom counted and individually placed 6 M&Ms into each of our outstretched hands. 

At the time, the only way to get her daughters to behave and not cry over their lack of candy-coated chocolate was to ensure that each little girl received an equal portion. In this case, an equal split was the fair choice for my mother. 

However, if my oldest sister was helping bake the cookies while my other sisters and I sat in the corner, was it really fair that we received the same amount?

In a family business, fair does not always mean equal. Especially when implementing a succession plan.    

Fair Might Not Be Equal in Family Business

As a family business owner, you may employ all of your children in the business in some capacity. However, some owners make the mistake of paying all children the same salary to minimize arguments and conflict among the children regarding earnings. This does not take into consideration differences in experience and responsibilities. While this may seem to be a well-intentioned idea, by paying them equally the children are not being paid fairly for their work.      

Family businesses impact all family members, even if not all are employed by the business. When finalizing estate plans, some family business owners make the same mistake. They think “I have four children, so I am going to divide the business equally amongst them so no one is treated unfairly.” While again this sounds fair in theory, consider if only one or two of the children have worked in the business and have experience running a company. Why would all four children receive the same stake in the business if they were not involved in the organization in any way? 

Significant Barriers to Family Business Succession Plans

Recent research from Exit Planning Institute found that 45% of family business owners have never had a family meeting pertaining to their business. As a family business owner, having serious conversations about the future of your business is paramount for its success.

By having annual family meetings to discuss the possible succession plans for the company, as an owner, you will be more prepared for an exit when the time comes. During these family meetings, any members of the family working in the business will have the opportunity to have their business suggestions heard. Those not working in the business will gain a deeper understanding of the inner workings of the business as well. 

Family Conflicts Become Business Conflicts

Families are not without their conflicts, especially in family businesses. 32% of family businesses surveyed by PWC in 2012 were apprehensive about the transfer of the business to the next generation and 9% saw the possibility of family conflict as the cause of this apprehension. 

Families can face the following challenges regarding the readiness they are to exit their business: 

• The family does not have a shared purpose or vision of what they want to do together and how they want to work together.
• The family has been kept in the dark regarding what the current generation wants to do with the business or their intentions as they work together in the future. 

Working with a Family Business Advisor

About half of business owners want to transfer their business to a child but only 30% do so. As a business owner, your family business advisor is a crucial member of your transition advisory team. They assist in managing collisions between the family and business dynamics. Selling the largest asset impacts the family.