What is fair? Dividing up the family business

[confused321]

3 siblings, A, B & C. All have good relationships with eachother.

A works in the family business (straight from education). It has grown substantially during this time thanks to the combination of parents and A working together. A has worked hard and receives a salary and benefits to reflect this.

B worked unhappily in a separate career for many years. Finally decided to leave that career and has joined the business . B brought professional knowledge and experience as well as much needed help for A who is struggling to keep up with the demands of the now much larger business.

C is much younger and is only just embarking on their own career but is seriously considering joining the business and has relevant skills which would be gratefully received there.

The parents of A, B & C are in the process of retiring and dividing up the business between the siblings. What would you consider the fairest way for this to be done is?

The current proposition is: A gets 50%, B 25%, C 15%, parents retain the final 10%. AIBU to think that this isn't fair? Would an even split between the siblings be more appropriate with salaries +/- bonuses to reflect the varying degrees of input?

Has anyone been in a situation like this before? If so, how did it end?

Thanks!!

Who are you in relation to A, B & C?

Surely it's up to the parents how they split it up and nothing to do with anyone else

I think the split seems fair considering A had put the most into it

Yes I have been there (only about 6 or 7 years ago).
I was effectively child A, brother was child B and sister was child C (although she was fairly well established into a different career).

Probably unhelpful to you but essentially I got the lot because I had worked in the business every school holiday since I was at primary school.

I had chosen my educational path specifically to set me up to take over from father right from when I chose my GCSE's in year 9 all the way through college and uni. There was never any question that I would run things and I'd have been pretty livid if a few years ago DB had piped up and said he wanted a slice as he had never taken more than a passing interest

The business is held in a family trust. It is controlled soley by me )as of the handover 6 years ago ) but it does place restrictions on me regarding liquidating assets and does protect my siblings from me cutting them off, thereby guaranteeing them incomes for life. Although small compared to mine, they are still substantial and they don't have to do anything (at all) to earn them. This annoys DW but she accepts that it's not really any of her business, it's between myself, siblings and father and was all set up years before we even met.

We all get on really well, it works just fine and everyone is happy.
if the others had wanted even shares (and had worked to earn them) then father would have left it in trust with the three of us equal partners. He has said he would have made DB a silent partner as until fairly recently he's not always been the steadiest, most responsible sort and it would have been a risk giving him any measure of control.

Interms of who runs the show, the parents overriding consideration must be what's good for the long term prospects of the business. It's not only the family whose future depends on it, but the staff as well and you have a duty of care to them.

Ice - I'm one of the siblings! Yes absolutely agree it is up to our parents and we will of course respect their wishes.

Man - Thanks for your interesting reply. I think the fact that your siblings are not working in the business makes things more simple. I'm pleased that everybody is happy in your arrangement. I think it has become complicated because potentially all of us could be working there to varying degrees. For example, C could start work there tomorrow and spend their whole career there (like A) yet would never earn what A does from it purely because C was born later?

Should be 3 ways imo. It's only down to age and circumstance that you don't all start on an even footing. Besides which, that's inheritance and income so should be split evenly even if A earns more just via seniority at the company.

Are you C? You can't predict the future and the split proposed seems fine based on what you've said so far. If C does join the business and grows it further etc then surely they will be able to take a commensurate salary out?

Bluesbaby - This is my thinking too. I'm worried that setting things up anything other than evenly split is going to ultimately create resentment and could be damaging to all of our relationships.

I'm not C.

Are you A OP

I think this is really, really tricky and I think it would be very hard to give advice without the full facts. Size of business, years worked etc.

In some respects I think an even 3 way split would be fairer as A and B have been paid for their work. It seems unfair of C to do badly just because they happen to be younger.

If A or B invested their own money in the business then they should get a bigger a share but if they were 'just' employees contributing in a normal way then they shouldn't benefit from the growth of the business other than an increase in salary.

No I think if you can say that the business wouldn't be as big as it is today without A's input then it us,fair to reflect that. After all C's 15% woud be a smaller amount without that effort having gone in.
Also C may be taking an interest now, but A has shown long term commitment and there's certainly a chance C will think "I have my 1/3 without doing anything, so I can sit back and enjoy it."

I think in your situation i would go with with A = 50% B = 25% and parents retain 25%.
C can work as an employee for a few years and once they have proved their value to the company and the commitment over several years (commensurate to the time that A and B have put in) , they should be rewarded with the other 25%.
If that doesn't work out then the remaining 25% is split between A and B.

C must earn their share as A and B have.

No I think if you can say that the business wouldn't be as big as it is today without A's input then it us,fair to reflect that.

..but he was being paid a salary for his imput.

It's a tricky one isn't it

It's really interesting to see how everyone has a different take on it!

Fairy - nice try! I agree with you.

Witchend - You are right, C could do that, but equally C hasn't had a chance to prove themselves or demonstrate long term commitment yet through no fault of their own. Can't you reflect A's input with a hefty salary?

Man - Do you think your siblings should have earnt their shares then? How do you feel running a business that supports them without them having to actually do anything? (Genuinely interested how that works).

Get the business valued first as if for sale and then get a family business adviser to tell you what they think. They do costings of the value of the staff, etc. Really, you want to price it for the future, not what happened yesterday, so I'm thinking A gets a lump sum.

Lanaor - It has been valued so we have a good idea of the actual figures involved which are pretty life changing, obviously substantially more life changing for A vs C at this stage though...

My siblings don't have a share , they are entitled to a yearly allowance from the business which is linked to profits but they don't own anything.

I see how my DW thinks (like you) that they should earn it but I got handed a good sized business , huge house (and I mean fucking huge - there are rooms I haven't been in this year) with over 2000 acres of land.

Sure I've contributed in that I've worked hard but it's not really mine in the traditional sense. I have just been deemed to be the most capable custodian from this generation who has the best chance of passing it all on in good shape to the next. While I have temporary custody I get to live in the big house and enjoy the lions share of the money.

The siblings allowances don't end up being much more than 10% combined so I don't really notice it, there really is plenty to go round.

They do have to work though, father doesn't want any of us to have the ability to sit back and do nothing while the others support them.
Their allowances are linked to their earnings in their careers away from the family business. They are only allowed to receive an amount equal to their salary , up to a maximum percentage of the businesses profits.

So DB earns about £110k in his career in the city, he receives another £110k from the estate making £220k a year. If he earns £200k next year he will get the same from the estate making £400k. This continues (upward or downwards), with the maximum he can receive from the estate being 10% of net profits.
The same applies to Dsis.

If they decide not to work and sit on their arses then they get nothing, although in the case of one of them loosing their income through no doubt of their own (such as redundancy) there is provision for me to override it and give them their allowance anyway (based on an average of their last three years salaries), I cannot refuse to give them their allowance though.

I'd ask your parents to think about what they would do if all 3 siblings were about the same age/ life stage as C
But there was a much-loved long-term staff member who'd done the same job, for the same salary and the same length of time as A

Would they give him/her a share of the business?
If they're lovely people they very well might

But would they give them 40% and the 3 children 10 % each?
Of course not, perhaps they'd give the long term staff member 10%
And if there was another staff member just like B, maybe 5%

This would leave 75% split between the siblings, ie 25% each, if parents keep 10%

So to put this scenario back to your family, it would be fair for each child to get 25% each as their "legacy"
Then A gets an additional 10% and B an extra 5% to reflect their contributions to the business

I think it should be a three way split.

If I were B or C and my parents went ahead with the current proposal, I would be looking into working outside the business in future as I could see myself becoming increasingly resentful working for the business for the rest of my working life when my older sibling was getting substantially more of the equity than I.

I think you need to separate the ideas of equity and salary from responsibility. Yes, your contributions to the business have differed between the three of you, but so far your parents have been sole owners, so two of you have been employees.

That should not make a difference to inheritance, which is basically what this is.

A and B should be given one third each (minus whatever parents are retaining) and a salary reflecting their contributions. C should be given one third and no salary.

This protects the rights of all three siblings, does not punish one or two siblings for having been born later or worked elsewhere, and reflects the existing input of A and B to the business.

Wow maninawomansworld01 your situation is interesting. I'm not sure how I'd feel if I was your DSis and I took time out for caring responsibilities so I lost my wage and my family income. I can't believe your DW has any resentment when you've had a life handed to you on a plate.

I think a 3 way split is the right thing as no one knows the future. What if a child of B or C ended up running the place in a generation with no prospect of having any significant ownership? What if A decides to go on a permanent holiday or gets ill after they've got their share? What if they all contribute 40 years+ from this point on? I can't imagine favouring one child more in such a way. I can imagine setting things up so a feckless child can't have control but not the favouritism. A might have worked hard, but they didn't create it (Please don't tell me A is male, B is back up male and C is female getting a token). By leaving an equal split they leave 3 people who feel equally invested in the future of the company and who have to work together to move it forward. That's a better legacy to leave your kids with surely??

This is really interesting to me. FIL owns a successful business which he'll probably never retire from . None of his DCs are especially interested in the area it serves, but one of them does work within it. However it's in a minimum wage position and essentially because he isn't really able to hold down a job otherwise. Other two DCs are not involved in business - one lives abroad. I do wonder what will happen with inheritance. Dh would like FIL to sell it it'll never happen and just add the value to his estate, as none of the DC want to or are able to run it. Who knows what will happen!

OP I do agree that C hasn't really had a chance to prove their worth yet, so I am uncomfortable with the arrangements, but I don't have any suggestions!

I think that seems about right. The business would not be what it is without A so A deserves the lion's share.

If C makes a good contribution then they could get the parents' 10% in their wills, maybe.

It has to be 1/3 to each son. Anything else could potentially ruin relationships and would be unfair

The sons who work for their parents
draw a salary for their work. They have been paid for their efforts. They haven't volunteered for free

or a split like 36% eldest, 34% middle, 32% youngest

Ignoring the family element for a moment. In an attempt to be dispassionate.

If this was a business for sale with 3 directors as you lay out:
One who was elemental in building the business to current size and will run the business in future
One who has contributed to stabilising the larger business
And one who is skilled but new to the business
[2 who are effectively future non-execs]

I would split similarly to the initial proposal.

A to get controlling share
Remainder to be split between B, C and non-execs with non-execs taking smallest component.

When a business changes hands in the usual way, directors are rewarded for their contribution and incentivised to remain with the business and their salary earned to date is sort of irrelevant, it's part of the running costs of the business.

C has the opportunity to contribute to business and help build up their 15% to an uncapped value.

If this is about what is best for the BUSINESS (which is how responsible directors should be thinking) then the split you outline is fair and sensible. I realise this is complicated by being thought of as inheritance, which it shouldn't be.