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Equally dividing a family business among the kids can be a mistake

On Behalf of | Sep 7, 2022 | Business Law, Estate Planning |

Parents do their best to love their children and treat them equally. This often carries over to a business succession plan where each child gets an equal share in the business. It may make the most sense on paper, but it could be a mistake. Equal shares can be a lethal blow to a multi-generation business or family-owned operation, whether a restaurant, ranch, manufacturing facility, or accounting firm.

Don’t assume

Business owners often dream of passing a company from one generation to the next. Or they are the recipient from a previous generation owner and strongly believe the tradition must carry on. However, the children may feel differently. Parents may make such mistaken assumptions that:

  • The siblings will work harmoniously together because blood is thicker than water.
  • The family chemistry will not change after they die or retire.
  • Each child will contribute equally to the success of the business.

Mixing business and family can lead to trouble

Family history will often impact working relationships, leading to real or perceived grievances that can move from one generation to the next. Some red flags include:

  • An unhealthy sibling rivalry
  • Different attitudes toward work
  • Skill sets that are not complimentary
  • Lack of interest
  • Resentment in taking on their role

Business owners can make choices

Parents who own a business can have frank discussions with the next generation to determine the interest level in owning or running the company. Perhaps there is one child who is both qualified and interested in a leadership role and ownership, or maybe an uneven ownership model where a sibling is more interested in a secondary role to better balance work and family obligations. Perhaps other siblings are content to be silent partners who may later wish to sell their share back to ownership.

Disputes will arise

Family members fighting over a company is never good business. It can happen after assuming ownership, positioning for control or during probate. Current or future owners can avoid this by drafting fair and equitable ownership agreements that may not involve equal control or ownership. If disputes arise among owners, there also can be a formal process involving a neutral third party, mediation or arbitration to resolve the issue. If these fall short, litigation may be the best way to resolve the issue.

Involving lawyers in family relationships is delicate, but it may be the best approach. It helps to clearly and legally define ownership and roles. Bringing outside guidance also enables the issue to be handled as a business matter separate from personal relationships.

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