Ask SmallBiz: Dividing Family Stock

June, 2009

Q. What should the owners of a family business consider when dividing shares of stock among their children? I have been told never to give two children equal shares.

-Monica Toguchi,
VP, Administration and
 Planning, Highway Inn Inc.

A. You’re right, it is a recipe for future trouble if you divide stock equally between two children. While the kids may work beautifully together and deserve equal ownership, when they do disagree about something big and are unable to compromise, the family feud begins. These feuds can be so deep and intense that families are fractured, relatives decide they want nothing more to do with each other and the business loses value quickly.

But what is the right division of stock? Ideally, the children have been working in the business and have shown they can lead, direct and grow the organization and that fuels the older generation’s desire for an exit plan. Think about each child’s education, the company positions he or she has held, and the positions into which that child will move. You also should consider each child’s desire to make the company a career for the long haul. Parents in a family business have the responsibility to truly know their children, and what their children want for their own future careers. Too often parents push their children into the family business when they don’t want to be there. This causes the kids to feel obliged, so they jump in and end up resenting the business and the family because they “had” to get involved instead of pursuing the careers of their dreams that played to their passions and strengths.

The largest percentage of stock should go to the child who is going to lead the business. The remainder can be divided among other children based on their roles in the company — the bigger the role, the responsibility and accountability, the greater the percentage of stock. But be careful not to create opportunities for collusion and controlling “blocks” that might immobilize the company’s leader.

If some children are not working in the business, the process is easier. They will ideally hold nonvoting stock, whether or not they are on the board of directors. If possible, build outside assets, so stock in the business is reserved for children working in it and the outside assets can go to the other children. Keep in mind, there are many other issues, including estate and tax considerations, that come into play in any stock transfer.

No matter what route you take, open communication about this issue among the family members who are involved in the business is vital. Since this is often difficult, get the help of professionals who understand the dynamics of family businesses and these kinds of decisions.

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