By Maurie Cashman
Limiting ownership to one child is often the reality for many families that wish to transition ownership of a business within the family. In Steps to a Successful Family Business Transfer, we looked at the obstacles unique to a family business transfer as well as the steps to take in a successful family transfer.
This week I want to discuss a key issue that can be difficult for parents developing an exit plan: limiting ownership to one child.
It is easy to recognize those business owners who have dedicated their lives to ensuring a successful transfer of a family-run business â€” they have but one child.
There are two possible ownership scenarios for families having more than one child. The first is that more than one child is active in the business. In that case, the main issue is to determine how multiple children will share the control and ownership of the company. The second is having one business-active child and one or more children inactive. The prevalent concern in that case is to transfer the business to the active child while being fair to everyone else.
If you are an owner if the first scenario you must ask yourself, “How can my children, who couldnâ€™t share a cheap toy when they were younger, now share the ownership, management and control of a successful, multi-million dollar business?”
Forcing children to work together ordinarily creates an unnatural combination of differing talents and desires, united only by ancestry. Contrast that situation with business partnerships where two or more individuals enter voluntarily into a business arrangement for their mutual benefit, each contributing experience, talent, and financial resources. In return they each receive an agreed upon ownership interest in the business. The key is that this is a proportion they agree upon, not a proportion given to them by someone else. They are also likely to have similar goals, ambitions, drive and ability. It is a desire for business success brings them together, not family ties.
Family ties of a different sort can also create disagreement and conflict. Adult children who, years before, found sharing a toy difficult because of sibling rivalry now find another relative introduced into the mix: their spouses. The influence of a spouse on a childâ€™s business decisions is similar to pouring gas on a fire. The addition of the ideas of in-laws into the baggage of long-standing sibling relationships can create even greater pressure on already-fragile relationships in the best of families. For this reason, co-ownership among siblings is rarely permanent, especially once the parents are out of the picture.
As a business owner, how many other owners do you know who share ownership equally with a brother or sister?
In many family-run businesses, a parent once co-owned the business with one or more brothers or sisters. Over the years, however, those siblings dropped out or were bought out of ownership. It would seem that co-ownership just doesnâ€™t work for most families. Itâ€™s unlikely to work for yours.
Success Factors in Transitioning to More Than One Child
If you still wish to attempt a transfer to more than one child there are several business characteristics that will increase your chances for success.
- Each child views business success through the eyes of the family, and each of its members, rather than through his or her own eyes.
- Each childâ€™s salary is based upon job description and performance.
- Children have been active with their parents in the business long enough to make each child comfortable with the role each plays within the business.
- One child has effective day-to-day control over the business operation. Usually control is granted to that child, not because of stock ownership, but because of the childâ€™s experience and leadership abilities.
- The business is large (and profitable) enough to support all children and give each child a separate area of responsibility.
- Alternatively, the business must be large enough to be considered an investment. This means it is mature, solvent, stable, usually run by non-family managers as well as one or more children, and has sufficient cash flow to handsomely reward the business-active child while providing an income stream to other children who are simply passive investors.
Next week weâ€™ll talk about a key to transferring ownership to children: fairness to all children.