Ground Rules for Family Employment and Stock Ownership
How CPAs can protect the golden goose that the family business represents to all concerned.
March 5, 2012
Imagine a highly successful, family-owned business that supports a first generation of aging parents and provides employment and a comfortable lifestyle for all 11 of their children (who are all now in their 40s and 50s). Relationships among this army of siblings have been remarkably good. Ten of the 11 are married and have collectively produced 24 grandchildren. Being CPA advisers with solid math skills, you can quickly grasp the financial strains that employing even one-third of these spouses and grandchildren will place on the parents’ growing business. I have shared this extreme (but real) example to illustrate why we need to guide our clients when it comes to family employment and stock ownership policies — to protect the golden goose that the family business represents to all concerned.
Who Should Be Employed in the Family Business and When?
In the real world, businesses need people who have the right skills (technical, emotional, intelligence, and leadership) to make a meaningful contribution to the success of their operations. For many businesses, this requires a college degree and/or technical training. In most cases, it is also advantageous for any family member joining the team to bring his or her experience and insight gained from prior employment outside the family business. With this as a backdrop, my typical advice to family businesses is to limit employment of family members to those who have completed the requisite educational requirements and have outside, relevant work experience that will benefit the business.
After recently advising clients to remove their spouses from the day-to-day operations of the family business in order to restore sibling harmony, I’ve become even more aware of the need for upfront ground rules regarding family employment. In general, I recommend against having what I would call a “lopsided spouse” at an executive level in the business. By “lopsided” I am referring to a situation in which one owner/partner has a spouse involved and the other owner/partner does not. Like it or not, the owner/partner with no spouse in the business will feel outnumbered on key decisions. That is not to say that a business with two spouses as lead executives is necessarily a bad formula, but they must be talented individuals with a strong working relationship that allows them to relate well to other members of the leadership team and be cohesive in making and carrying out strategies and decisions.
Children, In-laws and Parents
Children struggle to gain credibility in the family business under the watchful eye of parents, other employees, and, potentially, other relatives. Parents and in-laws of owners can face the same obstacles. This is why having and adhering to policies that spell out required skills and employment experience are necessary to ensure that those entering the business are poised for success. Other considerations that could be a part of policies include:
Being part of a family that owns a successful business will provide advantages and disadvantages to all family members, but choosing carefully who can join the business is vital to maintaining business health. By establishing guidelines and making good decisions at the time of hire, the family can maximize the positive impact the right family members can have on the business, as well as avoid damage to family relationships down the road.
Drawing on our experience as client advisers and entrepreneurs in our own practices, we know that managing expectations regarding career paths and promotions is greatly facilitated by:
When Might a Next-Generation Leader Be Considered for Stock Ownership?
The decision of when to transfer ownership is entirely a call that the majority of owner(s) can make. Most of our clients are none too eager to put stock ownership in the hands of their children until they have significant confidence in their leadership skills and business acumen. Other factors that may determine readiness to transfer stock include how financially set the majority ownership family members are, as well as their desired time horizon for exiting the business.
Most clients typically want to start this dialogue in the age range of 50 to 60 (although some hold out longer). This age range generally coincides with when the next generation of the family is established in the business and settled in their lifestyle and family choices. The financial stability of the business assumes even greater importance at this stage, since most parents want to ensure they give the next generation of owners a running start when they take over the lead roles. Bringing all these decision elements to the forefront for our clients is a key value-added role we can play as advisers.
In an upcoming article, I will provide some additional insights into the key decision of how stock ownership should be allocated among and between family members and whether to parcel out stock to children over a period of time or make large, lump-sum gifts to transfer ownership.