How can it be fair for one child to take ownership in the family business? What about the other kids?

Perhaps a hundred years ago, businesses (often farms) were often handed down to the oldest son. It was a way of keeping the business in the family and avoided the problem of splitting the family wealth every generation.

After all, royal families have done this for thousands of years… and still pass the crown to just one child.

Of course, this was very unfair for the other siblings (invariably the girls) who were left with the scraps of the estate.

Over time, this view has generally softened such that a sense of fairness now sees equal shares, and parents seek to provide fairness and equity in the distribution of their estate.

No favourites.

But when succession of the business is to occur before the parents die, then how best to make this fair? The most practical answer seemed to be to sell it to one or all the kids. The proceeds go to the parents and ultimately to their estate to be dealt with by their wills … “fairly” (however that is determined).

But what if the business is to be owned unequally by the children? This creates a few immediate issues. Price, funding, and entitlement – and missed opportunity.

Quite a few decades ago, it all seemed so simple to me.

As an accountant, the key to enable dissimilar ownership by siblings was to use an independent valuation of the business and then it didn’t matter which sibling bought what share. The siblings either paid for their share using externally borrowed funds or received vendor finance with appropriately commercial terms that incorporate potential risk.

Simple. But in practice, it wasn’t that easy.

My challenge with this problem all started with a succession of a long-standing family business. We were engaged to help the family undertake a succession plan and there were two of several middle-aged children who had expressed significant interest in taking the future ownership. The other children had previously worked in the business but no longer had any desire to continue in an employment, managerial or ownership capacity.

By the end of the planning process, the father (himself a second-generation owner) had agreed to sell the business to the two interested children. All good. Everybody was happy.

But at the last minute, the father changed his mind. He decided (for his own reasons) that it should be one child only, at the total exclusion of the other eager child. There was no changing his mind. That was a bombshell and it created mayhem. Now all the children outside of the business were angry, insisted in formal valuation, documentation, external loans, and lots of lawyers.

Yet it all went ahead. The sole sibling winner paid the agreed price and set about running the business for himself.

But the father’s decision burned the family deeply. Despite all those calculations of value and worth, there was ultimately little accounting for the right to participate, govern and own. Made worse because the father had not just ‘sold the business’ but had sold it to one child instead of another.

This outcome really impacted my thinking. How can you value opportunity?

At least every year since that time, similar succession situations have arisen …the prospect of the business being sold to one child instead of the others. In many circumstances, those others are not interested, but what value do you put on the opportunity lost?

For example, imagine a business was to be sold to a third party and that the business would be worth $1 million. Imagine instead that same business was sold to a daughter but not to her disinterested siblings?  The daughter borrows the $1 million and buys it for herself.  If the business fails, that is tragic, and everyone would feel for her.

But what if the business thrives under her leadership and in time is worth $20 million? How will that make the siblings feel? How will the parents feel about fairness and equity? Will they try to equalise this through their estate planning? Will it ever be enough?

The last few months have seen quite a few cases where the issue of equity and fairness of opportunity have presented themselves to Andrea and me.

Clearly there is no simple answer, made more complicated where some siblings treat the business as just a job where others have a passion. More complex where there is a sense of expectation, or one child has made their career in the business. Challenging when that child has been under (or over) paid for decades. Harder when some of the children (or grandchildren) are just too young or inexperienced. Difficult where there are large variations on the independent wealth (or needs) of the children. The combinations of issues can be bewildering!

Taking account of all these circumstances is difficult but somehow, an effort needs to be made to listen to the views of those children (and definitely the founder’s spouse). The ultimate outcome may well be some form of compromise or creative structure, built around the Family Creed (which governs the rights and responsibilities of members of the family in respect of the business).

There is often no simple answer.

One thing is for sure… I know that the ownership opportunity offered (at whatever price) has a value that must be considered and accounted for.  And whichever path is taken the key to a “happy” family outcome is clear and consistent communication.

We all know our children no longer seem to listen to their parents.

We have found that including an impartial advisor in the discussion creates a clear point of reference often in a lifetime of discussion.  Interviewing each child (whether in and out of the business) to find out what they think and want, provides a unique chance for that child (now a middle age adult or generation -X individual) to be heard.  Because the key to communication is listening.

Not an easy thing for a business owner to do by themselves.