How to face the dreaded 'favourite child' problem in a family business

WHEN THERE IS a small, family business and more than one child in the family there is an immediate dilemma.

Is it fair that one of, say, four children, should get the family business? What about the other three? How will they feel about it if their brother or sister gets everything?

This will always be an issue – and one that needs to be resolved as best it can be. There are a number of ways this dilemma or problem can be addressed, so let’s look at a few solutions and possible outcomes.

Let’s say the business is a family-run supermarket, which two parents – who have four children – have started from nothing and built into a tidy business that they both own.

The first scenario

All four children, who each worked in the shop as youngsters, have expressed interest in joining the business. Their parents say, ‘That’s a great idea’, and welcome them all into their business whenever they want to join.

The problems

The first question is, who is going to be the boss if they all get a 25% share in the business? Who is going to make the tough business decisions that every business needs made to survive?

How is the business, that up to now has supported just one family, going to be able to support four families down the line if they all get married and have children?

In 10 years’ time, how is the business going to fund a share purchase if one child has a disagreement with the others and wants to sell out?

Move ahead 30 years and you could have numerous cousins involved, with serious succession issues that might not be able to be resolved – and could force the business to close.

To consider

The first thing to think about and discuss is: What is the most important part of a family business? Is it the business, or is it the family?

I sometimes think that for a family business to succeed and continue into future generations then the priority should be what is best for the business, rather than the family.

Many will not agree with me on that, but if the interest of the family comes first and the business fails, then everybody loses.

The second scenario

The parents decide that only one of their children will be allowed into the family business.

The problems

Friction in the family. The other three children say, ‘It’s not fair, why should they be the one to get the business?’

The parents may weaken their position and decide to give the other three children 20% of the business each, while the sibling actually working there gets a larger share of 40%.

To consider

We now have a situation where one family works in the business but the other three can attend board meetings and between them own 60% of the shares.

If three of the siblings decide that they don’t like the way the business is being run, they have the shareholding power to disrupt operations and perhaps eventually force a sale.

The person running the business will forever be looking over their shoulder and might ultimately have to try to buy shares back. This could put a serious financial drain on the company.

Conclusion

Bear in mind that giving shares in the family business to one family member does not guarantee any future financial abundance at any time.

The family business’s future success will depend totally on how well the business is run by the new boss. It can succeed or fail. There are no guarantees.

However, children who don’t get shares in a family business can always be looked after in another way. For example, in many cases there will be the family home or perhaps a pension fund or other assets that can be left to them later on to compensate.

In many cases, especially if the family business isn’t successful, they just might be better off anyway.

The lesson is that succession planning in family businesses is a long, tough process. It does not happen overnight.

It is very important that the family business owner faces up to the difficult family and business issues that have to be addressed when trying to pass a family business successfully to the next generation. It will not happen by accident, it takes much planning and discussions.

In all cases, the best legal and taxation advice will be needed also. If, at the end of all of that, agreement cannot be reached, then the decision to sell the business – if a buyer can be found – might well be the best option.

Ted Dwyer is the founder of Ted Dwyer Family Business, a consultancy specialising in business and succession advice.

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