Making Cents: All In The Family Business
By: John P. Napolitano, CFP®, CPA, PFS, MST
The odds of a business surviving to a second generation are not good. They are even worse when it comes to stretching that to a third. For those who have done it well, there are a few moves that may be considered if your goal is to make that business last into the next generation.
The first is to realize that equal is not always equitable. Most parents want to divide their assets equally amongst their surviving children when they pass. This strategy can backfire when it includes shares of a family business. The strategies may be different for businesses where all of the children work in the business as opposed to when only some of them are a part of your business.
For businesses where the entire family works in the business, it may be acceptable to leave that business equally to all of your children. But you still need to recognize that ownership really has little or nothing to do with employment. Families who have succeeded by leaving the business equally to all of their children have established a governance structure whereby talent is rewarded based upon what they bring to the table and do for the business.
For example, in what business do you think it is fair for the President to make the same as the janitor? You need to establish a structure where compensation is decided based upon the roles that each person holds. This can be established through a shareholders agreement appointing someone or a group of people in charge of setting roles and compensation. Those not in superior roles earning the bigger bucks need to support those who are in leadership roles. After all, it is those leaders that are the drivers of what the business may become. And, the owners of the business will all share profits based upon their ownership percentage.
When not all of your children work in the business, having the non-employees as future owners can be problematic. Your first option is to equalize your estate using other assets to the extent possible. That may include your retirement assets, the home or two, and anything else of value equivalent to the value of the business. You may also consider the use or purchase of life insurance to complete the equalization process using death benefits.
If your other assets are not enough to equalize the inheritance, make sure that you’ve once again set up the proper governance structure to allow for the owner operator to have the flexibility that they may need to properly operate the business. This can be accomplished in many ways.
Options may include setting up an independent board of directors who technically hire the management of the company on behalf of the shareholders. You may also create a second share of stock whereby the owner operator controls the voting shares of the business and de-facto controls all of the major decisions to be made.
These decisions shouldn’t be made quickly and without good planning. Start early and while everyone is healthy.
John P. Napolitano CFP®, CPA is CEO of U. S. Wealth Management in Braintree, MA. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.