My Business and My Children – Equal or Equitable Treatment?

Author:Hank Harris

Baby ducks with their mother resized

Entrepreneurs generally start privately held businesses with a strong sense of ownership and personal identity connected to the business.

When the time comes to start thinking about the next generation of ownership and management, the children of the founder are often a natural prospect for both. However, most parents with more than one child marvel at how different they can all turn out! All were raised in the same home and in the same general way, yet personalities, opportunities, and interests vary widely as they matriculate into adulthood.

This natural phenomenon frequently presents business owners with somewhat of a dilemma; i.e., how do I treat my children – who I love equally – with respect to the business and its long-term continuity? This is an example of where advanced succession planning can make all the difference in the world, to the business, and all the people involved. Yet, for lack of planning and thinking things through, many business owners will have 100% of the business wind up in their estate, along with their other assets, to be disbursed equally to their heirs. In most cases, a very dubious decision sets families up for internecine warfare, the destruction of family relationships, and in many cases, the destruction of the business itself.

If you have a business that lends itself to passive investment (e.g., real estate holding company, family investment office, etc.), then having the business wind up in an estate for the equal benefit of children and successors might make sense. The same might hold true for a low-risk business that lends itself to passive investments. But most private businesses are operating companies subject to a certain amount of business risk and varied cycles of economic performance. They do not lend themselves well to passive ownership.

As a parent, you are tempted to treat your children equally. But what if you have three children, one of whom is a "natural" for the business; one of whom is not a fit but works in the business for lack of a better idea; and the third marries a neurosurgeon, moves to San Francisco, and is expressly disinterested. In most cases, the best answer is to diversify your interests enough to get control of the business to your "natural fit" child who will ultimately be running it. If possible, let the other two children get greater portions of your other estate assets to make up the difference. The best answer is to get the business in the hands of those actively managing it. Otherwise, there is a high potential for less involved siblings and their spouses to second guess management. This generally leads to problems – sometimes very serious problems.

Let's face it – you can't control how your children will run their adult lives, who they will marry, who they might divorce, how spouses will get along with each other, etc. But you can control who gets to own, control, manage, and continue your business and who gets other things. Letting an operating business drift equally into the hands of a group of siblings is often a huge mistake, with sad stories that develop after the founder is not around to see them. So, when it comes to your business, don't treat your children equally – treat them equitably.

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