When it Comes to Family Business Succession Planning, 'Fair' Doesn't Always Mean 'Equal'.
Updated: Oct 27, 2020
Family Business Succession Planning
What do you mean by, "fair doesn't always mean equal?"
Let me explain.
In terms of family business succession planning, many assume that the only way to put together a family business succession plan is to make everything, 'equal.' This is especially true when the outgoing, or senior generation of business ownership is mom and dad, and the incoming or future business owners are their sons and daughters, As parents, most of us are conscious about not favoring one child over another. And we are aware that certain actions or decisions can be 'perceived' by our children, and even adult children as being unfair. So our natural tendency as a parent selling our company to our kids is to be fair to each of our kids. And in our minds, fair means that each child receives the same thing. On the surface this seems reasonable, but experience tells me that this strategy is often fraught with negative complications.
When we objectively look at our children, often we can see that one child is more suitable for business ownership than another child. This is not a criticism of the child that isn't wired for business as much as his or her sibling. Just like it isn't a negative comment to say that one child is more gifted in music, athletics or a host of other traits and endeavors. It is simply stating a fact. One child is strong in one area, while another child is stronger in another area. This is simply a common fact in many families.
The problem lies in when we try to shoehorn our children into the business when they may not be gifted in the area of business. If it wasn't your child, would you hire them, much less make them an owner if they didn't display the skills and traits that you know are needed to be successful in business? Most rational people would respond, 'no' but that is precisely what many of us do when we think about leaving the business to our children in equal shares. Mixing children that have both an interest and a skill set for business in with siblings that do not share similar interest or skill is a recipe for conflict. I've seen it many times.
So what do we do as parents? We are between a rock and a hard place. We are in a no win situation. Either we split ownership equally at the outset to appease all of our children, at the risk of creating future conflict between them, or we divide the company unequally today and risk that one or more of our children resents our decision. I'm not going to say that the solution is easy. But I will say that as the senior generation, that you have a responsibility and an obligation to make the tough decisions when it comes to your business and to your family. If you don't make the tough decisions, who will? I'll tell you who. A judge will provide a judgement when your kids end up in court because they can't work together. Or when a child contests your will after your death. These problems don't solve themselves. So someone needs to solve them. And the best person to solve these issues is the majority owner(s).
I could go into great detail on ways to create fair but unequal business succession plan. But for brevity, I will leave you with a few suggestions and look to tackle this issue in greater detail in a future post.
One good option is to look at your estate as a whole, your business and all other assets that you have and separate it all among your children in a fair a manner as possible. For instance, if one child is getting all or controlling interest in the family business, then the other sibling would receive more of the non-business assets like real estate, life insurance proceeds or other forms of compensation. While business ownership would not be equal, each child would receive assets of similar value.
Another useful method is to hire an independent third party to evaluate the suitability of your children for future leadership, management and ownership positions. As parents we may have natural biases about our kids. We've raised them and we know their strengths and weaknesses. But sometimes this familiarity means that we have put our kids in their own box, and assume that is who they are, or who they will always be. This simply isn't always true. Third party professionals can provide an unbiased analysis of your adult children and provide recommendations as to who may be best suited to lead the company after you have retired. Adding a arms-length third party professional is almost always a good way to go when formulating your succession plan. But in the case of sorting through which one of your children is the best candidate to follow in your foot steps, this is always a good strategy to take.
I will leave the discussion here for the time being. In this article, I hope to have challenged any preconceived notion you may have that as parents and business owners we must give our company in equal shares to each of our children to be fair. Fairness and equality can be achieved in many different ways. And getting experienced expertise in the area of family business succession planning is helpful to ensure that you leave the strongest financial, emotional and relational legacy for your family as possible.