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Equally dividing a family business can be a mistake

On Behalf of | Jul 29, 2020 | Business Law, Estate Planning |

Most parents take great pains to ensure that they give each child the same about of love and attention. Therefore, it should come as no surprise that business owners here in Colorado often try to pass equal shares of the company or business to their children, whether it is two, three or five kids. Some business experts think this is a mistake.

Making costly assumptions

Parents sometimes make assumptions when they draft an estate plan without consulting the kids. It can put the viability of a business in jeopardy. For example:

  • The parent assumes that a family dynamic will not change when they retire or die.
  • The parent assumes that each child is equally suited or has complementary skills to ensure the company’s continued success.
  • The parent assumes that the children will resolve any disagreements because they share a bloodline.

It is complicated

Children bring a lifetime of experience to the table when they assume ownership of a company. Ideally, this is a good thing, but it may also include old petty arguments, resentments, and other perceived slights that non-family business partners do not have. Circumstances can be further exacerbated by the pressure of running a business, particularly if the partners make mistakes, or there is an economic downturn. Siblings making business decisions often can’t avoid someone making it personal, such as when a majority block overrules the minority.

Same blood, different people

While they may have the same parents, different siblings will likely have different approaches to work and the company:

  • Some may strive for work-life balance while others work seven days a week.
  • Some may be risk-averse, while others want to push in new directions.
  • Some may wish to invest in infrastructure, while others need to draw a larger check.
  • Some may want to run the business, and others resent being stuck with it.

Resolving disputes

Ideally, there are protocols for resolving significant disputes among owners. Whether it is mediation, arbitration or negotiation, many find it helpful to have a third party moderate the disagreement or represent their interests. If the partners cannot find a solution, it may mean buying out a partner.

Court may be necessary

Partners wishing to weigh their options can discuss these issues with an attorney with experience handling business disputes and transactions. While some business owners prefer to keep the matter inhouse, business litigation may be necessary to resolve an impasse. In either case, legal guidance can often help resolve the issue.

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