Family Business - Family Ownership Tree

Pruning the FamBiz Ownership Tree

Family businesses come to life in different ways, but their ownership structure usually starts out pretty simple. With the coming of age of the next generation of family members, things inevitably get more complex.

Preparing the rising generation to work in the business is a subject that gets talked about quite a bit. Preparing them to be good owners is also something that we are beginning to hear more about as well. All of this is good news.

But my subject today is based on a real life case, brought to my attention by a colleague. I asked her for permission to address it in this space, because I have not seen much written on it, and it can be pretty tricky.

Unfortunately there isn’t necessarily an easy solution, but then again, in the arena of family business, there rarely is.

 

The Case of the XYZ Family

My colleague and I are members of a “study group” of a dozen or so members of FFI, we come from a handful of countries, and it is always interesting to note the cultural flavour that comes with the stories we share.

The XYZ family is based in another country on another continent. X and Y are brothers, and they own their business 50/50. So far it’s pretty simple. Oh, one more important point, X is a silent partner, and Y runs the business.

I don’t know for sure but will assume that there is no shareholders agreement in place, likely because of the standard, “hey, we’re family, we trust each other, we will work it out” attitude.

 

Arrival of the Next Gen

The business continues along without issue, and the brothers start families of their own.   Y, the active brother, has a son and a daughter. X, the silent brother, eventually also has a daughter.

Just to add a bit more complicating “spice” to the story, Y’s son, Z, ends up going to work in the business along with his Dad, Y. X remains silent. Everything is fine, right? Well, for now, seemingly, yes.

 

Projecting the Future

So if you are Z, the son working in the business, what might concern you, long term? What issue keeps you up at night, to the point that you would raise it with your friendly neighbourhood family business consultant?

If you guessed “ownership”, give yourself a gold star.

The young man has likely already witnessed some of the difficulties that his father has had in running the business while being responsive to a silent partner, uncle X.

When he projects to the future, he sees a situation where he is the only family member working in the business, but his “silent partners” could be his sister, and his cousin.

If ownership follows the standard equal distribution among children that is the default in their country, he foresees himself owning 25% of the shares, and having to answer to his 25% owner sister, and their 50% owner cousin.

 

Sustainability in Question

When something can’t go on forever, it won’t.

Just to make sure we see the difficulty here let’s add another layer. Let’s say Z has five kids, and his sister and cousin only have one child each. And let’s say only one of his kids joins the company and runs it, along with his silent relative partners.

How would it be to own 5% of a company and run it for relatives who own the following shares:

Owner-Manager:        5%

Siblings:                        5%   /   5%    /   5%   /   5%

Cousin:                       25%

Second-Cousin:        50%

 

Thanks, but No Thanks!

Talk about a thankless job. Family businesses CAN last many generations, but those that do are the exceptions, not the rule.

We often look for whom to blame when they don’t last, yet sometimes just the way they are structured and the simple math of family division make it nearly impossible to make this work.

 

So Do We Give Up?

No.

We look ahead and foresee the potential issue, and talk about ways to resolve it. The brother owners need to realize that this can’t work long term, and figure out their next steps.

Assuming that Y can buy out his brother’s 50%, that would resolve a big chunk of it, for now, anyway.

They might even use a formula that Z will be able to follow to eventually buy out his sister down the road.

Bring it up, talk it out, resolve it before it kills the business.