Kevin Alerding Presents at Representing Indiana Businesses SeminarJune 13, 2018
A few years ago, my former colleagues and I hosted a discussion on the topic of How to Bring a Child into the Family Business. The participants were professional advisors from banking, investing, accounting, law, and related industries. Here’s a summary of the best thoughts and ideas that came from that discussion.
- Working in the family business is a privilege, not a right. No child is entitled to work in the company, and no child is entitled to hold any particular position within the company.
- Accepting a job in the family business should not be viewed as the easy path in life.
- A child must have the requisite formal education to be allowed to work in the business.
- A child should work professionally outside of the family business for a few years before being allowed to work in the family business. The child might be required to earn at least one promotion in his or her professional work outside of the family business before being allowed to work in the family business.
- When a child moves from outside employment into the family business, it should be a lateral move, not a promotion.
- A child should be paid fair market wages and benefits for his or her work in the business. Said another way, as an employee the child should have no greater benefits than other employees in similar positions and with similar tenure.
- After the child becomes an employee of the family business he or she should be supervised by someone who is not a family member and who has the intestinal fortitude to provide an objective evaluation of the child’s performance. A board of advisors also can be helpful in evaluating a child’s performance.
- A group of mentors could be established for the child to assist in his or her career progression.
- The senior generation should not try to force a child into a particular position. Few people have the right combination of skills and personality traits to be chief executive. Most people are better suited to more specific positions, like sales, accounting, or operations.
- A child who is being groomed to become the chief executive should hold various positions within the business. This diversity of experience, however, is not always necessary for children who intend to hold a specific and more limited job function.
- The company should have voting and non-voting shares. Family members who are actively involved in the business, or who have retired from active involvement, may own voting shares. Other family members should have non-voting shares.
- The business should have regular shareholder meetings. All shareholders, including those who own voting shares and those who own non-voting shares, should be presented with reports, plans, budgets, and projections for the business.
- Family members who are not actively involved in the business tend to be interested in receiving dividends or distributions. Family members who are actively involved in the business might favor reinvesting profits to expand the business. To resolve this conflict, the family members should enter into a buy-sell agreement that would enable the actively-involved shareholders to buy out the inactive shareholders. The valuation and payment terms should be within the market range, but restricted to prevent putting too great a burden on the company’s cash flow.
- Family members who do not work in the business should not expect to receive a salary, health benefits, company car, vacation accommodations, or similar benefits from the company.
- Long-term plans for business succession should be outlined early. Set the child’s expectations by starting with the assumption that the child will purchase the business from his or her parents at fair market value. The senior generation can always be more generous if circumstances allow in the future.
- The senior generation should make three promises. First, they will leave the business in good condition. Second, they will provide for their own financial security with resources other than the business’s cash flow (with an exception for seller financing). Third, after the senior generation exits, they will not continue to meddle in the business unless invited to do so.
- Whatever guidelines the family develops should be in writing and should be well-known by the family members. The guidelines should be part of the family’s DNA.
There was wide agreement among the professionals who participated in the discussion that bringing a child into the business is difficult – maybe even treacherous. Few families do it well. But if you keep these tips in mind, your chances of success will improve exponentially. If you have questions about business succession, please contact me here.