Why Can’t We All Just Get Along???

Normally partners choose each other for synergistic or financial reasons. Often next generation family members have no choice. It is a “shotgun wedding.” As a family grows and the number of family members increases this challenge becomes greater. While dividing everything equally amongst family members seems easier, it’s not always the fairest distribution solution. This is often the most emotional aspect of an estate distribution and business succession plan. A third party can be the non-emotional mediator for this difficult process. We have helped many families create specific rules regarding family employment, compensation, distribution of earnings and ownership of the business.

Here are four tools that are often used to help clarify boundaries avoid potential conflict.

Family Employment Policy: Lineal descendants should not be entitled to work at the company, its not a birth right.  There should be a corporate need, skill sets should match the position and family members should be subject to the same review process as non-family employees.  You may want to require outside employment with a complimenting industry.  It is good for family members to work elsewhere where they can gain valuable experience and most of all, fear for their job.

Compensation Policy:  Non-management positions should be compensated the same as any other employee (not above OR below market compensation). Management or Executive level positions again should be commensurate with the duties and based on experience, track record, performance, demographics (even a comp study) and no excessive perks.  Excessive pay is not fair to non-executive or inactive shareholders.

Distribution Policy:  Actives want to keep the money in the company for growth while inactive family members want distributions of profits.  A policy for a distribution percentage should be put in place to balance the needs of the business with the expectations of the owners.  This gives some protection to non-executives or inactive shareholders.  Of course there may be times (eminent financial crisis) where profits just can not be distributed.  The business is always first.

Shareholders Agreement:  Give them a way out of this “forced” partnership.  If someone wants out, make it possible!  If the shareholder is being forced out, they should be paid full fair market value. If someone is demanding to be bought out, it might be at a discounted price.  You can do this through puts and calls in a well thought out shareholder agreement.  Bottom line is that it must be both fair to the departing shareholder and feasible for the business.

These are a few of the many tools that can be used to govern the next generation of shareholders and help to avoid financial conflicts.  Each of these must be documented thoroughly and there are many other options to consider other than those I have mentioned in this post.  Important to any game, the rule book must be written BEFORE the game is played!