Passing a business to all the kids can be a mistake

On Behalf of | Nov 24, 2020 | Estate Planning

Parents often take great pains to avoid the appearance of favoritism towards individual children. This can help prevent feelings of insecurity, resentment or other issues. But preventing the appearance of favoritism can be misguided if it involves dividing a family business’s ownership equally among the next generation. Regardless of whether it is two, three or five kids, some business experts say this divided ownership can impact the company’s viability.

Avoid these costly assumptions

A parent may mistakenly presume things when they draft an estate plan, particularly if they do so without consulting the kids. For example:

  • They assume that the family dynamic remains the same after they turn over the reins or die.
  • They assume that each child is equally suited for the work or has complementary skills that ensure its ongoing success.
  • They assume the children will be able to resolve every disagreement because they are blood relations.
  • They assume that all the children want to be involved.
  • They assume the children are old enough or capable of running a business.

It’s complicated

Business partners may go back to school or childhood, but they come together with the unified purpose of starting or running a business. They agree to work together because they believe there is a better chance of success if they do.

For better or worse, siblings bring a lifetime of experience to the table – this includes good memories, bad ones and all types of irrational feelings and jealousies. Business decisions need to be made without someone taking it personally, particularly if a majority bloc overrules the minority. The pressure of running a business together can amplify all of it, particularly if there is an economic downturn or mistakes (which is part of the growing process for new business owners).

Different approaches

Business partners ideally have the same goals and complementary approaches, but families may not:

  • Siblings may have divergent views on work-life balance.
  • Some siblings may want to move aggressively forward, while others are risk-averse.
  • Some siblings may want or need more income, while others want to reinvest in infrastructure.
  • Some siblings may be more qualified than others and deserve a bigger say in the company’s direction.

Problems can tear apart a family

Owners should have honest, in-depth conversations with their children and then plan accordingly. Perhaps, it means dividing assets differently, so the business goes to a solo owner or a partnership. Whatever the solution, the business owner can save a lot of heartache and frustration if they carefully plan the transfer with all interested parties aware of how this will happen.