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Value Creation Blog

Investment Management in VT: Who Should Own Stock In Your Company?

Posted by Josh Patrick

august_24I spend a lot of time talking with business owners about the next generation in their business.  If it happens to be a family business we always get into a conversation about which children should own stock.

Unfortunately, more often than not Mom and Dad want to make things equal for their children.  They believe the best way to do this is to make sure each of their children share in the stock of the family business.  This is a disaster waiting to happen and something you should avoid at any cost.  Here’s why:

When you equalize you’re usually giving stock away.

One of the biggest mistakes I see in family businesses is when parents give stock to their children.  Way too often stock is given and not sold to family members.

The problem with this is you’re giving something away that has real value and you’re not requiring value be given to you.  It doesn’t matter whether you need the money or not.  What matters is that when you give stock in your company you’re setting up an expectation that there is a free lunch. 

If you’ve owned a business for any period of time you know that you worked really hard to build your business.  If you give it away, the lesson you’re teaching is it’s easy and you don’t have to work hard.  Don’t let your children learn the wrong lesson.

Children in the business want to re-invest.

This happens every time children in and out of the business own stock.  Your children who are running the business want to take a significant part of the profits from the business and re-invest.  If they don’t the business won’t last very long.

Your children not in the business see the profits from the business as theirs.  When money is re-invested they see that those profits as cash being taken from their pockets.  This belief always sets up major conflicts between your children in and out of the business.  Is this something you really want to happen?

You’re setting up a fight after you die.

You’ve decided to transfer business ownership equally with all of your children.  The result is lots of tension between your children.  While your alive this fight will never break out in full force.  After you die, you’re no longer there to be a leveling force.  The result will be your children will end up having fights about the future of the business and what should happen to the cash.  Is this what your intention is?  I hope the answer is a resounding no.

You’re going to make Thanksgiving dinners very difficult in the future.

I know I want my children to love and value each other for their entire lives.  I also know that I need to be mindful about what they get from us and how it will affect their relationship.  I’m hoping that you want to spend a little time thinking about what’s the best way to handle your business when it comes to future family stock ownership.

Here’s an idea.  I’m going to ask you to read a book by Tom Deans called Every Family’s Business.  Tom has done the best job of any author I’ve read in explaining why giving stock in the family business is the wrong step to take.  If you follow Tom’s advice there’s a pretty good chance Thanksgiving will remain a holiday you’re whole family loves…..even after you’re gone.

Company ownership is not the best way to equalize and be fair.

If you sell the business to the children who are in the business you’re going to get cash.  It’s a lot easier to equalize your estate with cash.  All you have to do is leave an equal share to each of your children and voila, you’re done.

Yea, I know I don’t understand what’s different about your family and why I’m wrong.  I can tell you one thing, I might not know your business.  I do know that estate planning is lot easier with cash than with an illiquid asset.  I’m going to just ask you to do one thing…..really think about how you’re going to plan your family business succession.  It’s time that will be well spent.

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Topics: exit planning, selling, stock

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