The Summit Series: Fairness is not always equal
Is it fair? As a parent, you love all your children and you’ve always tried your best to treat them equally. But you’re also an entrepreneur and you’ve worked hard your entire life to build the business you’ve always envisioned.
Now that you are getting to a point where you have to start planning your exit and possibly the transfer of ownership, you may be facing a painful dilemma. Should you share your business equally between your children? Or should you consider them as individuals, and assess their true strengths which may not necessarily mean business ownership?
Forecasting the future of your company is not an easy task, even more so if there are feelings at stake. With careful planning and an open mind, our partners have helped thousands of business owners navigate their personal journeys, no matter the situation.
The business relationship between this client and Richter partner Jordan Gould started in the mid-1990s. The client did an estate freeze to bring his two children into the business (only one of them went through business school). Herein is an issue common to many families: the question of fairness.
If one child shows the desire and the drive to take on the business, whereas the other may be lacking in acumen, education or interest, how should the business be passed on to the next generation when the time comes? In a business transition, how does a business owner avoid sibling rivalry?
This decision was not arrived at easily. After several meetings with the owner and legal counsel, as well as several one-on-one conversations, Jordan was able to offer creative options to equalize the estate, while still addressing the business allocation issue. After considering his options, the client and his wife decided to allocate 80% of the business to the active child who also displayed the strongest motivation.
To ensure fairness among his offspring, the father equalized the second child in terms of value with other non-business assets of the estate. This though brought the whole process to a critical inflection point: it challenged the family dynamics. They were able to overcome the situation through a lot of open and honest discussion within the family unit, guided by Jordan and their legal counsel.
A bonus structure was also created for the father after the business transition was completed to ensure that he would continue to be remunerated substantially, notwithstanding the freezing of his equity stake in the business. The freeze also allowed him to remunerate his children relative to their expected respective contributions to the growth of the company.
Since then, the business has thrived to the extent of reaching a 10-fold growth. While sadly the father passed away a few years ago, the transition of the business had been carefully planned. The family relationships remained harmonious and supportive, even during this time.
The current view
Today, the first child still holds 80% of the business and is currently thriving as President and CEO of the company and the second child has retired. The third generation of the family is now in their twenties. They are not currently involved in the business, and they might never be, so now a new question arises: “What are the objectives of this younger generation?” The future of the business depends on their answer, as offers to sell are starting to come in…
What we assisted with
To ensure further continuity we created an estate plan for this second generation, including a valuation and an estate freeze. For almost three decades, partner Jordan Gould has advised the family, providing them with process to help them navigate, not to force answers upon them. The family members say they can always rely on Jordan to give objective feedback and logical analysis, so they can then come to their own solutions and forge their own path, together, as a family.