Ownership Stages In Family Business
Readers may have noticed that the topic of “ownership” has been featured in this space more and more lately.
That’s no accident, because last summer when I wrote “Ownership: The Forgotten Circle of Family Business” I also vowed to give this subject a bit more prominence here.
The Simple Stage “Model”
Most people who work in the Family Business field are well versed in this “model” that looks at things in their simplest form as a family business goes from one generation to the next:
Sole Owner => Sibling Partnership => Cousin Consortium
There really isn’t anything new here, but it’s a good starting place to discuss how the ownership of a family business can get more complex as the business goes from one generation of owners to the next.
The verb I chose there, “can get” was very intentional on my part, because things do not necessarily get more complex, depending on the desires of the family and the plans that they make about how the actual ownership will be transitioned.
Does this Tree Need Pruning?
I recently spoke with a second-generation member of a farm family, and their case facts make for an interesting example.
Mom and Dad had 4 children, and each one of them is now married and they each have 4 children of their own.
The family group is expanding at a geometric pace. Will the farm be able to match that growth? That’s the proverbial $64 million question.
Counting People and Households
The farm initially supported 6 people in one household. One generation later, that became 26 people in 5 households. So far the math is pretty simple but only in a textbook example do things remain that way.
Did I mention that the range of ages of the grandchildren (G3) varies from late 20’s to single digits?
The oldest G3 member already has children and yet their generational “equal” is still in grade school.
How are they going to work out all of that stuff?
Getting Good Help
I often write about the importance of getting help from outside the family to assist and guide any family through these difficult decisions.
Luckily, there are surely plenty of well-qualified lawyers and accountants out there who have crafted the types of agreements and structures that are required to work out these complex cases.
So is that my answer, to go out and talk to a lawyer or an accountant?
Not so fast, please!
What Exactly Are You Trying to Do?
Before you look to technical professionals to structure things and write up the agreements necessary to formalize things, don’t you think it makes sense to figure out what you’re trying to do first?
How will the four siblings in the example above work through the decisions surrounding the best way to structure things?
I’m going to assume that the four siblings won’t all necessarily agree with each other on every question right off the bat.
OK, so what if the one who is the de facto leader of the business were to simply get a lawyer to write it up his way?
Well, that might be efficient, but I’m willing to bet that some negative consequences would result, somewhere down the road.
Governance and Ownership
Who died and made him king? Maybe that isn’t just a rhetorical question; maybe before Dad passed away he did “anoint” his successor.
I don’t know enough about the specific case facts here, but they are not that important to the discussion.
My point is that the ownership of the business is a very important aspect to understand and work through in a thoughtful manner, but it is not sufficient by itself.
A family facing this type of situation actually needs more than just clear ownership, they also need to agree on governance.
How Will We Decide Things Together?
When people try to simplify governance, they usually mention communication, problem solving and decision-making.
I can’t really make it any simpler than the six-word question, “How will we decide things together?”
It’s a pretty short and simple question, but answering it is rarely short and simple.
And getting the right answer for your particular family is actually more important to work out than the more straightforward questions about ownership.
Please see: Family Governance, Aaaah!