Attorney Information For Business Owners

Dividing Ownership Of A Family Business: 3 Factors To Discuss During Family Business Mediations

1 July 2016 by Ken Marshall

Keeping a business within the family can be much more difficult than you can ever imagine, especially if ownership disputes arise. The truth is that less than one-third of family businesses are able to successfully transition from the first generation to the second. If you don't want to waste all of the efforts that your parents or elders may have put into a family business, it's crucial for everyone involved with the business to sit down with a family business mediator to discuss how business ownership will be divided.

Current Growth and Success Correlated with Individual Efforts

When transitioning from the first generation to the second, it's important to discuss who has already put in time and effort into the business. This includes who may have already taken leadership roles by securing contracts or who may have spent a significant amount of time working out the logistics of daily operations.

If different family members have excelled in different areas and departments, dividing the business into departments in the future may be best. This way, second generation owners can really focus on refining certain skills that may benefit the business.  

Future Responsibilities and Growth

Another aspect to consider is the amount of time and effort that each family member involved in the business will be able to offer in the future. While some family members may have already spent a significant amount of time and effort into the business, they may actually be interested in pursuing a different business or career in the future. For example, some children may have put a tremendous amount of time and effort into the business, but have their eyes on pursuing a completely different career path when they graduate.

In these situations, it may be best to award the effort already put in by buying those family members out or giving them a smaller percentage of the business. This way, they can still reap the benefits of the business, but will not be able to make an executive decision on business matters in the future, as they may be out of touch with the business' needs as they go out to pursue their dreams.

Determine Value of Job Responsibilities to the Business

The value of the amount of effort and time put into the business may also need to be carefully discussed when determining how ownership should be divided amongst the second generation. For example, consider the following scenario: one individual puts in an extensive amount of time handling customer service roles while another individual may have spent less time securing large contracts that brought in the big money.

While some may argue that the individual who put in more time and effort in the business deserves a larger percentage of business ownership, others may argue that the individual who secured the contracts helped the business grow in the future. When dividing business ownership, it's important for everyone to acknowledge the amount of effort each individual put into the business, but also agree on how the job responsibilities should be valued.

Conclusion

It's not uncommon for family businesses to fail because the family members involved in the business cannot agree on how ownership should be divided amongst the second generation. Don't wait to discuss such sensitive matters until it's too late. To make sure that ownership transition from the first generation to the second happens smoothly, it's imperative that everyone involved in the business sits down to discuss their concerns and viewpoints ahead of time.  

Share

Search