Family Business Succession Planning: Who gets the interests?

Part 2 in a series…

Who gets the interests* in the business? Only family members who work in the business, or every member of the next generation?

While much depends on the particular circumstances of the family and the business, some thoughts:

What’s fair?

Fairness is in the eye of the beholder: transferring an equal slice of the business to each member of the next generation is not inherently more equitable than transferring a controlling interest to one and a participating but non-controlling interests of equivalent value to others, or than transferring the business to one and non-business assets of equivalent value to the others. The key phrase in the previous sentence obviously is “of equivalent value”, and it is worth considering sources of non-financial value conferred by a family business when thinking about allocating assets.

Who will care for the business?

Is the next generation committed to tending to the business in some capacity – whether as owner-managers, as board members, or as active shareholders? The past success of the business can’t continue without interested, capable, and active owners, and even if the next generation member doesn’t participate in the business on a day-to-day basis there is considerably more for an owner to do than collect dividends or distributions. Long before ownership is actually transferred, the next generation needs to begin learning about the rights and responsibilities of ownership, so that when and if the time comes for them to assume ownership, they do so with eyes wide open.

If one child has managed the business for years, while others have successfully entered other occupations, the obligations of shared ownership may be an unwelcome burden to the non-managers. In this case, it may make more sense to gift or sell the business to the family manager, and then allocate non-business assets among all the children. If management of the business will rest on the shoulders of one family member, while ownership is transferred to the next generation as a group, developing clear and accepted governance procedures will be critical. Do all parties understand and respect the rights and obligations of management? Of the directors? Of the owners?

What if the next generation isn’t interested?

If there is no interest or participation by the next generation in the business, selling the business to a third party may make more sense than keeping it. Blasphemous? Maybe to some families, but ironically, selling the family business may be what enables the family to further its legacy in other areas. A sale can free up capital to enable the next generation to invest in new business ventures or philanthropic efforts. If the senior generation is ready to transfer the business but the next generation simply isn’t old enough or experienced enough to take over the responsibilities of ownership, transferring ownership in trust may be a worthwhile option to consider…more on that topic coming up.
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*By “interests in a business” I mean shares in a corporation, partnership interests, LLC membership interests, an undivided interest in real estate - an interest in the family enterprise, however that may be structured for legal purposes.