Many of my clients are successful business owners who, when it comes time to retire, don’t need a substantial profit from the sale of their business to support their retirement lifestyle. That doesn’t make their succession plan any less complicated, though. If anything, the decisions are even more emotionally fraught—because the question is no longer simply, “How do we make sure we have enough money to retire?” but instead, “How do we make sure our family stays on good terms?”
In this scenario, most family members all want the exact same thing—a successful business transition that leaves no financial strain on anyone, where everyone walks away happy and excited to get together at Thanksgiving (or at least, no less excited than before the sale of the business).
But how that goal is communicated and carried out isn’t always clear.
That’s where we step in.
In this article, I’ll discuss some of the complications that arise when the second generation is involved in the sale or gifting of a business and how to navigate them.
When All Your Children Are Involved in the Business
Among all children with siblings, there is an undercurrent of entitled equality that begins in childhood. Brothers and sisters “need” things to be fair, and no parent wants to hear the dreaded, “He’s your favorite! You love him more than me!”
Of course, as adults, children may not readily admit these assumptions and fears aloud, but the tension is still there. This can make things awkward in a business setting, where compensation is presumably merit-based.
This is one of the biggest issues I see in family business transitions. It’s rare that the playing field is level among siblings regarding their professional responsibilities. Oftentimes, one child is more financially savvy, or one brings in more revenue—and when it comes time to pass the business to these siblings, a whole host of awkward questions arises:
- How should the equity be divided if responsibilities aren’t equal?
- How will we divide Mom and Dad’s responsibilities?
- Who has authority for final decisions?
- Who has hiring and firing authority?
- How do we resolve disagreements?
- Who decides the direction of the company when major changes are required?
It’s a lot to think about, and these conversations become even trickier when the first generation passes away.
My recommendation to families in this situation is to create an org chart for their business. Sit down as a family—ideally, before the business is sold, gifted, or inherited—and decide who is responsible for what. If sales is a large department, put someone in charge of it. Appoint someone else to operations, and so on. (The book Traction, by Gino Wickman is a great tool for this process.) Then later, if there are disagreements among the siblings, the final say goes to the one in charge of the department in question. The key is to create this org chart while the first generation is still alive, so they can help settle disputes about who is in charge of what.
Business partnerships fail all the time, and family dynamics make everything more complex, so having clear, defined lines before the first generation is out of the picture is incredibly helpful.
The Tough questions
Of course, an org chart doesn’t solve the issue of unequal inheritance. After all, should Jim get more equity than Michael, given his overweighted position in the company?
Unfortunately, there’s no standard answer or solution to these kinds of questions. Only Mom and Dad can answer them, and they require careful thought and intentional conversations among the family.
Of course, intense family conversations are no cakewalk, especially when money is involved. They can be incredibly difficult and awkward, full of emotional reasoning. That’s why it’s helpful to have a neutral third party in the room. This is something I do for clients all the time—I’ve spent hours leading a family through their company’s org chart and facilitating conversations to help them come to the right decisions.
A third party can help guide the conversation to avoid common pitfalls, keep everyone organized, and set goals and deadlines to hold everyone accountable. They can also help translate words among family members—I can’t tell you how many times I’ve shared the same information a family was resistant to hear from one family member but received from me with open acceptance. Because again—family relationships make things more complicated.
What comes next?
Every business and situation is different, so working with an advisor who knows you and your family can be immensely valuable when navigating these tough conversations. Between helping clients, growing up in my family business, and working in my father-in-law’s business, I’ve witnessed or experienced just about every situation imaginable—and the questions covered in this article just scratch the surface.
In my next article, I’ll explore some strategies for families who have some children in the family business and some who aren’t involved.
In the meantime, if you’d like to discuss your family’s business transition, we can help you consider the pros and cons of each scenario, facilitate productive family conversations, and ensure you make the best decisions for you and your loved ones.