Children in the Business, It's Complicated

Children in the Business, It's Complicated

Defining the members of your business family can be difficult. Especially, when considering the idea that your family business members include anyone you do business with for reasons other than just money. As a result, family dynamics can become quite complex among minority partners you may have, whether they are blood related or not.

Whether your minority partner joined you via a stock recognition plan, equity buy-in along the way, or at the inception of building your multi-unit franchisee business, there are very simple, common expectations that surprisingly can get misconstrued. First and foremost, is simply that we are in this to make money. Period. The second is that your partner provides something that you consider important to the overall success of the organization.

Simple, right? Well, unfortunately there is at least one season of life that complicates these simple assumptions: The coming of age of children, whether yours or your partner's.

Let's assume for a moment that neither yours nor your partner's children have shown any interest in your business. Then you can continue doing what you're doing without interruption and everything will work out, right? Well, in today's world, it is not out of the realm of probability that a child will live with mom and dad into their 30's. There are many households with highly educated tenants unable to pay rent. Having worked with several mom and dads in this position, I can attest that there is a natural inclination to view the business as an opportunity to help launch Junior into the world and get them on their way. As a result, it can be extremely difficult to deny a request to give Junior a job until they figure out what they want, particularly if you have not addressed it ahead of time. Furthermore, it is in this moment that at least one partner has shifted away from the first simple expectation - you are no longer in business just to make money! The business has become a support system, fallback plan, and potential enablement vehicle that transcends day to day business performance.

Also in this scenario, many young adults have no idea what they want to do, and there is a natural tendency by parents to keep the opportunity open should the children make up their minds to commit someday. This has been known to impact hiring decisions, delaying the fulfillment of vital management roles within the organization in the hopes that one day Junior will want to join the business. Sounds crazy but it's true! Again, this is a shift away from the "profitability first" approach that puts the minority partner in a precarious position to either engage in the family dynamics or begrudgingly bite their tongue. This is when the value of the partnership can begin to decay, causing a minority partner to withdraw and subsequently be less inclined to contribute at the level you had grown to expect. Therein lies the shift away from the second simple expectation, you are no longer as concerned with your partner's input, even though they will share in the result.

Further complicating the "no children in the business" dynamic is the question as to whether the business can be kept in the family and operated by a Board of Directors, or whether a sale is imminent. Although there is significant complexity surrounding the Board of Directors, it can be done. A sale is the simplest alternative, but the question becomes to whom and at what price? Under the umbrella of a "family business," sales and transfers among family are generally expected to be made as fair as possible and commonly involving discounts, while a sale to an outside third party merits a hardline negotiation to capture every dollar available. How do you find balance if your family sells to your partner?

On the other hand, if either partners' children or family seek employment in the business, there is obviously a long list of governance considerations that easily exceeds the scope of this article. One significant factor pertaining to this topic however, is finding the balance between the urgency to remain bottom line focused while being patient with the developmental process of a successor. Part of the beauty that a family business can offer is the lack of the publicly traded company type of pressure requiring immediate returns. The strategic planning of a privately held business can and should take into account a much longer focused timeline, allowing for the development of the next generation of leaders. This long term approach, however, is likely to result in a performance dip at some point during the process. If your partners are not onboard with the potential for a self-imposed performance dip, then trouble is certainly on the horizon. This is a difficult tightrope to walk as every successor needs the opportunity to learn from their mistakes, but is it okay if it's at the expense of a partner simply looking to maximize their return?

Clarifying expectations of the next generation, whether or not they are in the business, is a critical step in maintaining a lasting partnership. If you're thinking that you've got time and it's not a problem right now, then now is the time to address it. Overcoming partnership issues regarding family after the cards are on the table can be like putting toothpaste back in the tube!

 Jeff Bannon is a partner with The Rawls Group - Business Succession Planners. Entrepreneurial owned businesses are close to Jeff's heart. With the recent passing of the baton of his family's law firm between his grandfather to his sister, Jeff has witnessed the benefits and rewards the planning process. For more information visit www.rawlsgroup.com or email info@rawlsgroup.com

Published: June 26th, 2018

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