Equal and Fair are the Same, Right?
Equality and Fairness being one and the same is the proverbial “tail wagging the dog” in family enterprises. When deciding how to best transition a family business between Next Generation members, the Current Generation often acts on the belief that equal is fair and fair is equal. Well intentioned decisions based on this belief may prove to be detrimental to the family in the long run especially if the belief stems from a fear that any other formula for transition will lead to distrust and bitterness within the family.
Consider the following:
- The Current Generation transferred ownership equally to their three children and they gave each “equal” titles and compensa- tion for their management roles. Two of the children perfected their golf game, while the other child doubled the value of the company through her outstanding leadership.
- The two sons that played scratch golf received the same compensation and dividends as their sister while she worked tirelessly in the business and missed the growth of her children.
Does equality in this case seem fair?
So, what should a family consider when transferring ownership?
- Define your values – does fairness mean that those who contribute the most get the most? Or, that each will be treated equally regardless?
- Separate management from ownership – roles and compensation for management contributions should be based on merit and what the market pays for non-family management. Ownership percentages can be viewed separately from management contributions and perhaps be equal or not. Further, there are ways to distinguish current value from future value – the first being equal and the latter not equal based on next generation contributions to growth. Consider all options.
- Look at all assets – if the family has other assets which are not co-mingled with business assets these can be used (if desired) to create a greater sense of equality.
- Use advisors effectively – a cross group of advisors that cover a range of disciplines, such as legal, accounting, insurance and family business consulting can help you to articulate a plan that includes a range of options and creative ways to manage the intersection of family and business.
- Don’t let estate tax mitigation drive the decision – the current generation should first and foremost protect themselves to ensure their own income needs. Too often, estate planning techniques push assets down prematurely. When this happens Mom and Dad are still dependent on the business and thus, the succession process is impeded.
Strategies has a signature medical model combined with proven management theory and hands-on experience for helping the family business work through all of these issues. As an unbiased sounding board, these advisors can see the big picture and understand the family dynamics that often overshadow sound business judgments. The goal is to create a vision for the business and an implementation plan that will ensure the survival of the business for the next generation.
For more information, or to answer any questions you may have about succession and continuity planning, please contact Mitch Vandiver at email@example.com or call 410-363-6669. www.strategiescorp.net