I mentioned in my last article that I’ve experienced family business from multiple angles. I grew up working in my father’s business (which my brother is taking over), I’ve guided clients through their sales and gifting, and I currently work alongside my wife in my father-in-law’s business.
Suffice to say, I understand the complexities—and rewards—that come with working alongside family. And these complexities reach a whole new level when it’s time for Mom and Dad to leave the family business.
Many of my clients are highly successful businesses owners who don’t need to rely on the proceeds from a sale to support their retirement. So when it comes time to exit the business, their top priority isn’t personal financial security, but keeping the peace within the family.
The irony is, the parents often think that the abundance of resources will mean there won’t be any tension among the kids—after all, there’s plenty to go around, so money should be the last thing on their minds, right? But the fact that there is so much to go around often means tension is unavoidable. Mom and Dad don’t want to leave anyone out, and the siblings want their “fair share”—even if they were never part of the family business.
Let’s talk about some complications that arise when a family has some children involved in the business and some who aren’t.
WHAT MAKES A FAIR PRICE?
Consider this scenario: Samantha has been part of her parents’ business for 15 years, and she’s contributed to the company’s growth in considerable ways in that time. Her brother Jordan took a different career path and opted out of the family business. When their parents are ready to retire, the company is worth around $5 million.
Samantha is committed to the business, and her parents are willing to sell it to her at a discounted rate of $2 million. This seems fair, given her contributions to the company—and she’s their daughter, after all.
But where does that leave Jordan? He’s positioned to inherit half the proceeds from the sale—and half of $2 million is certainly less than half of $5 million. His sister gets a great deal, and he misses out on part of his inheritance.
On the other hand, if their parents sold the business to Samantha at fair market value, she feels gipped—after all, did she put in 15 years of hard work just to pay full price so her brother and sister-in-law could reap the benefits? How is that fair?
You can see how things get messy quickly. Even if all the siblings have a “do what’s best for Mom and Dad” attitude, that doesn’t prevent the monetary discrepancies from rising to the surface later and potentially causing tension.
So what do you do?
COMMUNICATE, COMMUNICATE, COMMUNICATE
As I mentioned in my previous article, communication is crucial to alleviating tension and misunderstandings around family money. But of course, talking about who inherits what is easier said than done. It can feel awkward, and it’s difficult for everyone to remain logical when emotions are running high. That’s why I recommend bringing in a third party to help facilitate the conversation. There are going to be pros and cons to just about every scenario, and it helps to have an objective voice who can explain things in an unemotional way.
This is one of the most important things I do for clients who have family businesses. My goal is to help both generations consider the situation from all angles and come to decisions that are best for everyone. Of course, final decisions about inheritance are ultimately left to the first generation, but having everyone at the table can help each party feel heard.
Beyond communication, there are some strategies that help bring layers of “fairness” into a family business transaction that involves some kids who are part of the business and others who aren’t.
CREATE A WIN-WIN SCENARIO
Sometimes, the question to ask isn’t, “Who’s getting the better deal?” but “How can we make this situation a win for everyone?” There’s lots of ways to do this—it might mean making the pie bigger by reducing the amount of taxes paid on the sale of the business, or restructuring the terms of the deal so everyone feels like they’re benefitting at some point.
If the business has a brick-and-mortar location that Mom and Dad own, they might opt to keep the real estate in their name and have Samantha pay rent (which can supplement retirement income if needed). Then they would transfer ownership of the property to Samantha upon their death. This way, Mom and Dad avoid paying capital gains and recaptured depreciation, and Samantha receives the real estate with a stepped-up cost basis.
One way to balance the scales among heirs is through life insurance. If Samantha gets her $2 million “sweetheart deal,” Mom and Dad could update their policy so that Jordan later receives what Samantha is getting today through the discounted sale of the business. Or they may simply opt to accelerate their gifting to Jordan in the meantime.
There are lots of ways to equalize the distribution of assets, but it requires the first generation sitting down and discussing their options with someone who understands both the financial intricacies and the relational complexities of closely held businesses. Having these conversations early is one of the best things you can do as a first-generation business owner—and if you’re ready to discuss your options, I’d love to help.
STILL HAVE QUESTIONS?
Of course, sometimes fairness among siblings isn’t the issue. Sometimes none of the kids want to be involved in the business, and that brings up a whole different set of concerns and considerations. My next article will cover how to optimize the sale of your business with an outside buyer while minimizing the tax burden for you and your family.