The Fair Transition of Family Businesses

When the going gets tough and families are feuding, fairness is always an issue—and usually, it’s about more than just money. Managing family-owned enterprises and managing family wealth is no easy feat. Family businesses sometimes struggle to define fairness among family members. Why is it so hard to define fairness?

Maybe because fairness in the family business sense is about more than the money — it has to often be more about the innate less tangible issues. It is about the emotional side of things – about feelings.

When it comes to transferring wealth to the next generation—especially when those next generations are involved in the family-owned business—fairness goes beyond its textbook definition of “impartial and just treatment or behavior without favoritism or discrimination.” Generally speaking, fairness is defined by rules that are garnered from our faith, family or institutions (e.g. government). The “rules we live by” are set by small groups of people and applied to larger groups of people in hopes of achieving fairness. However, when it comes to families gifting their wealth to the next generation, fairness is in the eyes of the Grantor.

Fairness is a two-way street, and often needs a crossing guard. On one side of the street, we have the Grantor whose personal perception of fairness creates a framework for distribution of wealth among family members. On the other side, the beneficiary of that wealth creates his/her own interpretation of fair based on the size and distribution of the gift. But crossing the street is complicated by the oncoming traffic of opinions from family members. Here are a 9 philosophies that create harmony for family businesses in transition:

1) Remember that wealth is a gift not an entitlement. As a whole, beneficiaries tend to take better care of the gifts they receive than entitlements they think they deserve.

2) Your wealth is not your only gift. Measuring fairness in assets only devalues the many other intangible gifts that have been passed onto the next generation. Sometimes the beneficiary who receives the least is ultimately the individual who does the most with their gift. That is because they focus on what they can do with what they have been given, instead of obsessing over what they “should have” received.

3) Equality is not achievable, but fairness is. No matter how hard you try, you cannot achieve equality because it is about more than money. It is tied up in timing, genetics, opportunities, good old fashioned luck, and so many other factors. And money is not the great equalizer

4) There will always be a needy one. Just plan on it. There are always family members who are constantly in need of money. The ones for whom “nothing is ever their fault” or “have the worst luck.” Accounting for them can involve more nuanced planning. A Grantor’s challenge is protecting the other family members from self-induced failures.

5) Expectations rarely yield expected results. A grantor’s personal or professional expectations of their children, regardless of age, be met with positive, long-lasting results. Children either excel at what they want, the way they want, which leads to happiness, or out of a desire to please the Grantor, which eventually fails with unintended consequences. So use your wealth to help children find their own gifts and offer them the greatest gift (above your love), which is to tell them the story of how the wealth was created (the good, the bad, and the ugly).

6) Fairness and harmony go hand in hand. Finding family harmony takes so much time. If it were easy, families would stay together more often. Spend those family meetings and social outings seeking harmony among family members—even when it feels like it is a waste. After all, fairness tends to be both more achievable and more digestible when the family is in harmony.

7) Don’t keep score in a game where there is no winner. Siblings or beneficiaries who keep score are playing a game where there is no winner (except the attorneys), and will only foster jealousy, distrust, anger, and resentment between family members. Grantors are human; they are going to give what they want, to who they want, for their own reasons. Instead of keeping score, seek to understand why the Grantor is allocating assets in a certain way and support their decision. The results will be far better.

8) Define “fair”. While this may be the hardest thing you will ever do as a family, spend time defining what fair means in your family—and why. Defining “fair” isn’t just for those who have lots of assets; it is for everyone. It starts as soon as there is more than one party who will benefit from a gift you’re sharing with someone, whether it is tangible or intangible.

9) Let business be business. While I have heard every patriarch/matriarch say “business is business,” it is rarely applied—and for good reason. There is something innately gratifying about seeing your child(ren) carry on your legacy, especially in a family business,

 

 

( All factual and statistical information presented in this blog has been obtained from an extract of an article from the The Family Business Magazine) Follow us on our Facebook page and Family Business Office website at www.familybusiness.org.mt

At the Family Business Office we can offer you assistance in dealing with family business succession planning issues through incentives supporting advisory and mediation services. Contact us today on [email protected].