Dividing Ownership Among Children
Not unlike every other important conversation between spouses, succession will have its ‘Venus and Mars’ moments. One spouse will rationalize feelings, basing arguments on emotions rather than reason. The other will fall back on objective measures and past history, often holding steadfast to a clear set of facts and refusing to budge. As often happens with couples, the two sides may become interchangeable, as each flip-flops, given some introspection and allowing for a bit of outside influence.
The longer a discussion lingers, the more frustrating it can become. Arguments always adjust to fit the circumstance a person wants to justify. Although each family’s situation is unique, there are a number of factors an owner should consider when defining equitable distribution of business interests among children. Those factors may be the basis for dividing the owner’s assets and should establish:
- Who will receive property, especially related to business interests, only children active in the business, or all of the children in the family?
- Which property will active and inactive children receive–equity, voting/nonvoting shares, other assets unrelated to the business, etc.?
- How much they will receive? Will you grant equal dollar values to all or reward those children who contribute to the success of the operation?
- When will they receive it? For children active in business, will ownership be granted over time to ensure a smooth transition and for those inactive, will assets be distributed in the settlement of the estate?
Here are important questions every business owner should consider before dividing ownership among children:
1. Does the owner have sufficient resources to fund retirement if the business is transferred during lifetime?
- If not, the owner should receive some consideration in return for ownership or retain the business.
2. Does the owner want the active children to receive the business if the owner dies prematurely and/or the children are not ready to assume a leadership position?
- If so, there should be adequate resources to ensure the family’s financial security and pay for interim management.
- If not, the owner may prepare for a sale or redemption of the business in case the owner passes before a successor is ready.
3. Will an immediate (and/or gradual) transfer of the business to the active children create conflict among the family if the inactive children do not receive an equitable distribution until a time when they settle the owner’s estate?
- If so, the owner may consider transferring voting stock to the active children and nonvoting stock to the inactive children.
- An owner also may consider allowing the active children to purchase ownership on favorable terms and conditions.
4. If there are multiple children active in the operation, are they capable of working harmoniously with each other, dividing duties and respecting each other’s positions?
- An owner may consider appointing one leader, assigning respective roles in the operation and/or establishing a board of directors to help make decision.
5. Do the active children have the skills and abilities necessary to run the business, or should the owner consider a transitional management plan until a family member is prepared to lead?
- Transitional management can fill a multitude of roles including mentoring, advisory board and business leadership if the owner has minor children who have not yet made a career commitment.
6. Has the owner made provisions for premature death, disability, dissolution and divorce?
- A well-crafted buy/sell agreement will help to maintain the integrity of the operation and ensure the family’s financial security.
7. Are the active children currently participating in a professional development program, including experiential learning, education and mentor-protégée relationships?
- Each leader in the organization should be responsible for, and accountable to, a written leadership development program. A well-designed program will increase the organizations capabilities and improve bench strength.
These seven simple questions should allow for constructive conversation. Not one is steeped in emotion or detached from reality; rather each is meant to encourage dialogue. Using the questions to structure discussion will help family business owners in defining their succession intent. Even if you have an existing succession plan, it’s never too early to revisit the topic and refine your objectives, making sure your actions align with your goals. Succession is a process, not an event.
Also, access eLegacyConnect’s ‘Equal Isn’t Fair’ self-assessment to more clearly understand the concerns involved in this complex topic.
Kevin Spafford is the founder of eLegacyConnect which provides succession solutions for farm families. Members of National Sorghum Producers receive a discount for full access to eLegacyConnect (membership code sorghumgrower).