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Dividing the family business equally can be a mistake

| Dec 7, 2020 | Commercial litigation

There is a long and proud tradition of parents handing down a business to the children. Ideally, this can go on for generations. While it once meant that the oldest son inherited the store or ranch, it is now often a matter where all the kids get an equal share whether there are two, three or six of them. Parents do this because they do not want to appear to favor one or two children over the others, but an equal partnership can lead to disputes, even among siblings.

It’s best not to make assumptions

Some business owners planning on passing the business to the next generation may talk in general terms about giving it to the kids as a family legacy. Still, it is a mistake to make assumptions:

  • Don’t assume that blood is stronger differences over the running of a business.
  • Don’t assume that equal shares of the business are the best approach.
  • Don’t assume that the partnership dynamic will remain stable after the parents die or retire.

Family histories are often complicated

Two or three partners may meet in college or while working for someone. They start a business because they have common goals, a complementary skillset, and clear guidelines as business partners. A family-owned business can be different:

  • Petty grievances from childhood can reappear and hurt the health of the company.
  • Business decisions may involve personal feelings.
  • The person doing a job may not have an interest or capability to do it successfully.

These should all be red flags for a business owner.

Business is business

It is better for a business owner to put the business’s health first. This can mean selling it to someone outside the family if none of the children are interested, passing it only to those who want the challenge of running a business, or putting one child in charge because it gives a company the best chance for ongoing success.

Dispute resolution

Every business needs a business plan, even ones owned by family. Among other things, it should have protocols where the children can refer to a format to resolve disputes. Ideally, this involves a discussion among the partners, but it can also involve using an outside mediator, arbitrator or someone who has a neutral presence. If this does not work, the only way to equitably resolve the issue may be for the children to litigate the matter in court.