When planning their estate, many parents choose to simply divide their assets equally among their children. But distributing ownership of the family business poses a significant challenge.
Dividing ownership equally might make sense on paper, but it may also prove problematic long-term. The risk is that children who have invested time and potentially money in the family business will have to share control and profits with siblings who have not been involved. Though some families may be able to navigate this situation and ultimately find a way to succeed, there’s no guarantee that will be the case.
When it comes to distributing ownership of the family business, you’ll likely discover that what’s equal isn’t always fair, and what’s fair isn’t always equal. To preserve family harmony, consider an estate equalization plan—a strategy to divide assets among children who contribute to the business and those who do not.
According to the 2021 Family Business Survey, only 34% of U.S. family businesses have a succession plan. This statistic may help explain why only 12% of family-owned businesses survive after the passing of their founder.
Succession planning helps ensure your business remains active and successful after you retire or unexpectedly pass away. Indeed, distributing ownership of the family business to your surviving children can be a viable succession strategy. Nevertheless, it’s important to address potential issues of fairness and equality to provide a smooth transition.
While the inheritance you leave your children is largely a personal decision, its impact is far-reaching. This consideration is especially true when it comes to distributing ownership of the family business. The decision will have implications not just for your family but for your business associates and customers.
As you plan your estate, you’re generally faced with three broad choices: distributing the business equally among heirs, offering some children a non-business asset of equal value, or rewarding the contributions of the children who’ve been involved in the business.
According to MassMutual’s 2018 Business Owners Perspective study, roughly three in five (58%) business owners plan to divide ownership of the family business equally among their children. This strategy is the most direct approach, and it may be the one that your children expect.
But equal distribution can create friction between those who have been involved in the business and those who have not. In other words, some children may reap the rewards from a company that their parents and siblings have built. Yet this may not seem fair to other family members.
You might consider transferring ownership of the family business only to children who have been involved in it. At the same time, you can provide an equal inheritance for your other children with assets outside the family business.
This approach ensures that children who have taken a different career path can receive the same financial benefit as their siblings. In addition, it may help your family avoid the conflict that can arise from granting all children equal ownership of the company.
Some business owners get creative and provide something of a hybrid approach. Children who have been involved in the business inherit full ownership, while others become non-voting members of the board. This tactic means that all children can benefit financially but will not have to actively share in the company’s responsibilities.
Finally, you might want to reward the children who have made the greatest contribution to the family business. In fact, many families already do this, just in different contexts. For example, many families distribute a larger inheritance to caregiving children. Alternatively, they may grant a smaller inheritance to children they’ve already supported through graduate school or financial hardships.
Of course, if some of your children have ownership today, this might mean they receive their inheritance now through the family business. Meanwhile, the others may have to wait to receive their inheritance until after you pass away.
Likewise, the children who currently own the business might not receive a future inheritance other than their stake in the business. To avoid confusion or resentment, it’s often best to have these conversations well before the time comes to distribute the family business and your estate.
Before you make a final decision, you’ll want to assess the desires of your children. Do you know if your children want to take over the business one day? Can they recognize the contributions their siblings have made to the company? Do they already have expectations regarding your will?
These questions can help guide your decision, though ultimately, it is yours alone. Once you have chosen a plan for distributing ownership of the family business, call a family meeting. Use that time to communicate your wishes, listen to your children’s feelings, and make adjustments only if necessary and expedient for your family and your business.
Distributing ownership of the family business is an important consideration—not just for your family but also for your community. Indeed, family-owned businesses create 78% of all new jobs. And family-owned companies employ 60% of American workers.
Leaving your business in the right hands preserves your legacy and allows you to have a lasting impact on the world you leave behind. To improve your chances of long-term success, it’s best to start planning early. This will give you more options and give you ample time to identify potential problems and address them as needed.
Oak Capital Advisors specializes in the unique financial planning needs of small business owners. If you’d like to learn how we can help you plan your exit, navigate your estate plan, and secure your future, please request your complimentary Financial Independence Roadmap™.