Fair versus equal
In a family business, equal is rarely fair and this is one of the main sources of conflict. This issue applies to many facets of a family business, ranging from compensation to ownership. Usually, all next-generation family members are paid the same despite a large discrepancy in responsibility, years of experience, education, and commitment. This often results in frustration from those who work the hardest, and in extreme situations, can result in the family business losing the most valuable family members.Â
To avoid this pitfall, successful family businesses develop a compensation philosophy or approach based on paying fair market value. In other words, family members will be paid the same as non-family employees that do the same job. A similar situation can occur with shares in the family business. Since parents love their children equally, they usually want to divide the business equally amongst them, whether they are active in the business or not. This is done with the best of intentions, but can often lead to further conflict between next-generation family members. The allocation of shares—as well as the manner in which it is done—is one of the biggest contributors to the ailing statistics in family business succession.Â
Here’s another anecdote. A family business owner with three daughters transferred ownership equally among them. Sarah, the youngest of the sisters, worked in the business and had been managing the daily operations for the last five years. The business continued to be successful under Sarah’s leadership and annual dividends were paid to all three shareholders. However, as time passed, dividends became an issue. The two non-active sisters made it clear to Sarah they were counting on their annual dividends and they expected they would increase given the store’s performance. They reminded Sarah that together they held two-thirds of the voting control. Sarah had no choice but to concede and continuously alter her plans for investing into the future growth of the business. She also grew to resent her sisters as the business declined.
When I received a call, Sarah told me she heard a rumour her sisters were thinking of removing her from her leadership role in the family business, since they felt she did not share their vision for how it should be run. Yet, Sarah was the only one with knowledge of the business, as well as business experience and qualifications. The parents—the store’s former owners—had no idea choosing to split the shares equally among their three children would lead to so much family conflict. Unfortunately, the two sisters decided they wanted to sell the business to maximize their personal wealth. That was the end of the family legacy and the end of any family harmony.Â