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Value Creation Blog

Who Should Own The Family Business?

Posted by Josh Patrick

family business resized 600I recently asked a client of mine to start the process of asking his family who should own the family business.  This is a question that you need to ask if you have more than one child and one of them doesn’t work in the business.

Would you want to support a sibling who’s not in the business?

Ask yourself; if you were in the place of your children who are in the business would you want to support your siblings?  This is what happens when you insist on splitting the stock in your company between all of your children.

The majority of family businesses are small businesses.  They do way less than $20,000,000 in sales.  They don’t produce an awful lot of profits.  The profits that are produced are needed by the business for growth and a rainy day fund.  Is it fair to expect that your children who run the business need to put aside money for the support of your children who aren’t in the business?

You’re probably not going to have a problem while you’re alive.

You might say, “Why would my children in the business have a problem with this?  My kids get along great.  There’s no chance that they’ll fight about what happens to the cash in the business.”

This is probably all true while you’re alive.  You’re still around and your children won’t complain if they don’t get too much money from the business.  After you’re gone there’s a good chance that the children in the business will want to re-invest in the business.  The children not in the business will want cash.  Your family might be different but do you really want to take that chance?

Do you want to leave a natural fight to your children?

There’s always tension between siblings when some are involved in the business and some aren’t.  I’ve seen this happen too many times:  The children outside the business feel like they’re owed money on an annual basis for their ownership.  After all, they’ve waited till Mom and Dad pass on.  Now it’s their sibling’s job that is in the business to provide cash for them.

Unfortunately this is often what happens after you die.  It’s only natural.  We do what we perceive is in our own best interest.  Ask yourself this question, “Do I want to leave a natural fight between my children when I don’t have to?”

Don’t saddle your children with support of their siblings.

I was lucky.  My father never wanted to saddle me with supporting my sister.  He was very clear that I was going to buy the business and he would loan money to my sister to start her business.  You noticed I said buy the business and not give me the business.  Since I bought the business there was no need for him to consider splitting ownership.

He never offered my sister the option to buy the family business.  I never had the option to buy into my sister’s business.  I think this was very wise on my father’s part.  It sure was better than having my sister as a partner.  I think she would have said the same thing about having me as a partner.

Think long-term and start this very hard conversation.

This is a hard conversation.  You may have already started gifting stock to your children.  It’s not too late to start the conversation.  I hope you don’t want to start a fight with your kids after you’re gone. 

There are better ways to handle this.  Speak with a professional who deals with these issues on a regular basis.  If the professional is good he or she will be able to guide you through questions to ask and conversations to start.  The key is to start the conversation and keep talking to you get to a logical conclusion.

Part of the process of having a conversation about the family business is to understand how strong the business is.  We have an instrument that can help you understand how valuable your business is to others.  If you’re interested in getting this report, click on the button below.

Salability Index Report

Securities and Investment Advisory Services offered through NFP Securities, Inc. (NFPSI), Member FINRA/SIPC. Stage 2 Planning Partners and NFPSI are not affiliated.

This article is published for residents of the United States only.  Registered Representatives and Investment Adviser Representatives of NFP Securities, Inc. may only conduct business with residents of the states and jurisdictions in which they are properly registered.  Therefore, a response to a request for information may be delayed.  Not all of the products and services referenced on this site are available in every state and through every representative or advisor listed.

Topics: Family Business, for business owners, Children

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