Keeping it in the Family

Dad Always Liked You Best

Passing a business on from one owner to another is tricky enough under any circumstances. Throw in the intimate relationships, history, and other dynamics that exist in every family, and the process can become many degrees more treacherous.

The trickiest waters to navigate when children are in line to inherit a family business come with plain old sibling rivalry. One or more offspring might feel they’re entitled to a share of the business or a role in its everyday operations, whether or not they’re qualified to take it on.

“It can be tough for parents to make the hard choices necessary to keep the business successful,” says Steven Kruger, an attorney with Best & Flanagan, a law firm in Minneapolis. “The simple fact is that some children are well suited to take over and some aren’t. If more than one child wants to be part of the business, the compensation plan needs to reflect their relative contributions. Treating them fairly doesn’t always mean treating them equally.”

Almost invariably, when there’s more than one child involved, one will take a more prominent and active role in the company. That’s a factor the parent should pay special attention to, even if it has the potential to create hurt feelings.

“If one child moves away, and the other stays to help the business grow, it seems clear who it should be left to,” Kruger says. “Distributing the business evenly among family members just because they’re family can be a mistake.”

Assigning roles is another area where prior planning can be invaluable. When planning for succession, you should make sure every child is well aware of his or her role in the transition—or the lack thereof. And make sure it’s all in writing.

“In many family businesses, because of the family connection, they think it’s not necessary to have a shareholder agreement or a buy-sell agreement,” says Thomas Hubler, president of Minneapolis-based Hubler Family Business Consultants, which provides business and interpersonal consulting for family-owned businesses. “A well-drafted shareholder agreement provides an orderly method to transfer shares and prevent a major disruption of the family business upon such events as death, divorce, bankruptcy, termination of employment, or disability or retirement of the owner.”

A good shareholder agreement, Hubler says, includes generous provisions for the restrictions of shares owned by private companies, and will specify under what circumstances shares can be transferred, who will be able to purchase the shares, the process by which the value of the stock will be appraised, and the terms for purchase of the shares.

“The best time to create a shareholder agreement is when you start your family business,” Hubler says. “The second-best time is if you have already started your business and everything is going well. The worst time,” he adds, “is when you’ve been in business for a number of years and a dispute arises.”