How to split up ownership of a family business
When planning the future of a family business or estate, one of the most difficult questions facing the outgoing generation is how to divide up ownership and assets among family members. There are essentially two ways to do it—”equal” or “fair.” Understanding the difference between them is essential, especially in a world where the complexity of financial considerations around family business and estate planning is ever-growing. “Fair or equal,” though, isn’t just a financial decision. In a family business, it’s a deeply emotional one. But let’s start with the definitions.
Fair vs. Equal—What’s the Difference?
“Equal” means what it says. In this case, you would divide all business assets equally among heirs. This option appears simple and conflict-free—but it often isn’t. This option works best when all heirs are working in the business and everyone’s role is comparable as far as decision making, required effort, etc. But what about cases where only one or two heirs are running the business while the others are not involved? This is where “fair” might make sense.
In a “fair” distribution model, assets are divided based on contribution, role, responsibility, or life circumstances (it is a family, after all). Shares won’t be equal in dollar amounts, but they will be intentionally balanced in a way that serves and rewards each heir. “Fair” is of course subjective, which makes it susceptible to charges of favoritism and resentment. When using this model, good communication is essential.
In my work as a family business consultant, I have seen many parents who believe that “equal” is the only way to do it…fairly. But an “equal” arrangement with unequal contribution can result in resentment amongst family members, imbalance in the business structure, and paralysis in decision making that could destroy the business in a generation. Needless to say, “fair” versus “equal” is an incredibly important decision. If planned and communicated correctly, it can help preserve both family harmony and business success into the future. But it can be tricky.
The Emotional (and Irrational) Reality
When financial decisions are made in a family business, they aren’t just numbers on a ledger. Some of these decisions can be viewed by adult children in the family as statements about love or worth. Emotional responses always precede rational ones, and in a family, the emotions are amplified. I’ve seen this play out numerous times. An example: the son who only wants to join the business “when he’s ready” but it given an equal share to an older sibling who has already put in years in the business. Is equal treatment the right thing here? Probably not. But someone is going to be unhappy no matter which direction you choose. The best (and only) way to avoid this is great communication. Every family business is unique, with its own structures and issues and desires. But at the heart if every family is the desire to feel respected, trusted, and understood. If you start your planning with this premise, the road ahead will become clearer.
How to Structure Ownership With intention
Once you’ve decided on the “fair” or “equal” principle, it’s time to structure ownership in a way that reflects your values. You must communicate the new structure clearly and announce your intentions early. Your plan should:
Distinguish active vs. non-active heirs. You may want to consider a structure where active heirs—those running or significantly contributing to the business—receive ownership, voting rights and leadership roles, while non-active heirs can be compensated through other assets, non-voting shares or liquidity via buy/sell agreements.
Use straightforward and intentional language: make your plan and your motivation clear in the structure, so that your heirs know both the “how” and the “why” behind the plan. If everyone is on the same page, things will go smoothly.
Communicate, early and often. None of this works without communication. Make it known that your intention is to create “fairness” that feels equal. Talk to your family every step of the way to ensure you’re all in it together.
Create a living document. Things change, and eventually the plan will need change as well. As life and business go on, different heirs will have different needs. Structure the plan in a manner that allows for change under certain circumstances. By doing this, you’ll leave a legacy but spare the next generation the handcuffs.
Treat the Process Like Family
By approaching these decisions with clarity, empathy, and ongoing communication, you’ll leave your family more than an inheritance, you’ll leave a shared understanding of how the business will carry forward, and the knowledge that everyone participated and was heard in the formation of the family business’s future.
