Many parents go to great lengths to treat their children equally. So, it should be no surprise that business owners often will try to divide the family business equally among the children, regardless of the number. However, some business experts believe owners should rethink equal ownership because it may set up the kids for failure.
Don’t make assumptions
Parents will sometimes make assumptions when they draft up an estate plan without discussing the business’s stewardship with the kids. For example:
- Parents may assume that blood is thicker than water, and the kids will work together.
- Parents may assume that the family dynamic, while mom and dad are active, will not change once they leave the business or die.
- Parents may assume that each child is equally qualified to operate a business.
Family businesses can have a special ambiance that customers like. Still, business partners who grew up together accumulate a certain number of grudges, insecurities, petty resentments and perceived slights that business partners who did not grow up together often avoid (at least initially). The added pressure of taking over a business can exacerbate the situation, mainly if the company is not doing well or new owners make the inevitable mistakes. Running a business by committee can also lead to factions amid the group, leading to resentment if a minority continually gets outvoted.
Different people, the same blood
The parents may be the same, but kids may have different perspectives on the business:
- Children may have different ideas about work-life balance.
- Some children may be unwilling to change anything, while others push for new ideas, approaches, products, or services.
- Some children may want or need to draw a larger check, while others want to reinvest in infrastructure.
- Some children may want to be there, while others want to sell it.
Disputes are a fact of business life
All partnerships will involve disagreements. Ideally, the owners can work out their disputes themselves, or perhaps with mediation or arbitration using an outside person or attorney. If these negotiations break down, partners may end up in court to resolve the matter through litigation, which may adversely affect the company’s viability or reputation.
With all this in mind, it makes sense that a parent planning to pass a business to their children should speak with them and then consult with an attorney. These legal professionals can help reduce the potential for dispute when drafting an estate plan or planning business succession.