Question: I have a thriving food manufacturing business that I want to leave behind to my five kids. The eldest is 25 years old, the youngest 10. Should I give everyone equal share? – Peter by email
Answer: Giving all five children equal share may seem fair, but it may not necessary serve the best interest of the business.
How do you know that all of your children are capable of managing your business? How do you know that each of them is willing to join the family business? What if some want to work abroad and live there permanently? What if no one is interested to join the business because they have their own career or ventures that they want to take care of?
Let’s say your eldest has shown some interest in taking care of your business. He has given up a promising career to manage and grow the business, while his siblings are still in school. Would it be fair to him if you give everyone equal share when he has done more for the business?
What if his other siblings want to be involved in the business too, later on? With equal shares, the siblings may demand equal vote in every business decision. While this may seem democratic, it carries certain risks for the business, as not all siblings may be familiar with the company. Nor do they share the same vision and passion in building the business. Some may be doing it because of family politics. Some simply may just need cash. Some may have a different agenda. In the end, all these could hurt the business.
If not all your children equally contribute to the business, it may be fair to give more shares to those who are already helping in the business. This way, the business will have a better chance of surviving, because those who do their share in the business will be properly rewarded for their efforts and presumably be more focused on doing the job.
How do you allocate equity when the business adds more shares later on? Again, attribute the extra shares according to your child’s contribution to the business.
For example, if the value of your business at the time before any one of your children has joined was Php 10 million, you would have distributed 50 percent of the business equally to your five children at Php 1 million each. Let’s say your two eldest children finally joined the business the following year, and because of their active participation in sales and marketing and later on in the management, the value of your business would have grown over the years to Php 25 million.
A portion of the increase in the value of your business, which is Php 15 million, can be allocated as additional shares to your children. In this case, you will share 50 percent of the Php 15 million as extra shares to your two eldest children, which is Php 7.5 million. Their share would depend on their roles in the business.
What will happen to the three other siblings when they grow up? They can become passive owners of the business and may pursue other interest and earn annual dividends from their stakes. In the future, they can also sell their shares to their elder siblings.
Why distribute just 50 percent of the business to your children? As founder, you may keep half of the business under your name, but your share will eventually be distributed to all your children equally as part of your estate when you pass away.
Every family is different. Some parents will give more than 50 percent of the business to the children and make themselves as minority shareholders even if they are still living. Some parents will divide their estate by giving the whole business to the children who manage the company, while giving personal assets to those not involved in the business.
Distributing a business based on merit should encourage children to work harder to make sure that your business will last into the next generation.
Henry Ong, CMC, is president of Business Sense Financial Advisors. Email Henry for business advice firstname.lastname@example.org or follow him on Twitter, @henryong888