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In business transition, being fair does not mean everything is equal

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Transitioning the family business is very challenging. Just look at the statistics of transition success – 33 percent make it to the second generation, 12 percent to the third, and a mere 3 percent to the fourth.

Throw into the mix multiple siblings and cousins, and it gets even more challenging. The desire to be ‘fair’ can create a number of unintended consequences including some major family conflict.

When one or more siblings or cousins have worked in the business and devoted their career to it, sharing ownership with other family members who have not worked in the business is rarely successful. But nearly 60 percent of business owners say they plan to divide ownership of their business equally among their children, according to a 2018 Mass Mutual study.

In businesses where one family member works in the business and others don’t, it’s important to look at alternative ways to transfer and share the wealth of the family fairly. Most of this can be addressed in estate planning, where the non-working family members receive a portion of the estate that is equal to their working sibling’s value of the business. One way of accomplishing this is by utilizing the death benefit in a life insurance policy and non-business assets. Those children who do not get ownership in the business instead get a larger share of the insurance benefits and non-business assets at the owner’s passing.

In the case where you do share ownership with non-working family members, consideration to voting vs non-voting stock is the very least that should be done. Although every family, and every business, is different, this remains constant – if you’re the family member putting in the blood, sweat, and tears to keep the business alive and successful, you’re not looking for other non-working family members to start telling you what to do.

While most owners have their children’s best interests in mind, their intentions and visions don’t necessarily line up with the reality of their ownership transition decisions. Family businesses in which the father or mother, depending upon who runs the business, is dictatorial and arbitrary in deciding who will do what, often have the most trouble. And owners who say, “I’ll let them figure it out after I’m gone,” also are setting the family up for a mess.

The key to a successful family business transition is to recognize that passing along a business takes time, often years, as well as communication and accountability on all sides. It’s also important to remember that ownership transition and leadership succession are not one in the same. Start now and get some outside help to provide perspective and solution options.

Tom Garrity is managing partner for Compass Point Consulting LLC in Hanover Township, Northhampton County. He can be reached at tgarrity@compasspt.com

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