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!!

Upon parents death they each get eqyal ownership with one third each of remaining profits. But those remaining profits are calculated after salaries for any cgild who works there. A inherits managerial control. Any child working for the business is paid a salary that reflects their roles. Plus a bonus depending upon how well the business dies

I realise I'm being a total jobsworth about this but those of you thinking it should be an even split, what would you think if your employer put a third of their business in the hands of an inexperienced director fresh out of education?

As directors of a company (which is an entity in its own right) the parents responsibility is to what is best for the continuance business, not for their children. OP is there other inheritance (property etc) that will be evenly split?

Agree that parents 10% should form part of Cs inheritance. (Hopefully some way off OP)

I think even split with different salaries to reflect experience.

Agree with Gold above. One person A has to have a controlling interest whatever happens otherwise if e.g. a and b were equal and a year down the line wanted the business to go in different directions or to sell just their share, someone has to have overall decisions. B and C could band together to override A if they really disagreed but otherwise one person should have overall control even if by a small amount.

salaries and bonuses reflect experience and contribution. shares in the business should be fair.

My DH has this problem, he has taken over the family business and his sibling gets a substantial salary- enough to live off and not work. DH has grown the buisness and has worked very hard in it for many years. They will inherit 50/50, he is in the process of asking for at least a 51/49 split so he has controlling interest. Obviously different to your situation but I think it's ridiculous that DH will spend his life building something then hand over half of it to someone who does nothing....

A - 33.33%.
B - 20%.
C- 10%.

Parents retain the other 36.6666% and dole out when / if B & C hit the same service / contribution as A.

o 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.

That seems quite an unfair way of paying out.

So one sublime decides to be a teacher on £30k and the other in IT on £100k and they get hugely different amounts from the family business for no reason.

Or one becomes a doctor and goes off saving lives in terrible conditions with MSF - they get nothing even though they are working their ass off and doing something infinitely more useful than almost anyone else ever does.

I would have set it so they go the same amount as a % of the bus profits as long as they were in full time work or something.

What if C makes an astronomical impact though?

Split evenly and salary to reflect contributions

We have a similar situation, with my DP being 'A', the other two siblings don't really work in the business, other than odd bits here and there.
They've structured it so that 'A' gets shares of the business annually as a reflection of his input to the business, and so already owns part of the company. His parents retain the rest which would then be split evenly between the siblings when it comes to inheritance. So effectively the inheritance is split into thirds, but by working for the company A will ultimately own more. B & C aren't really interested in working for the company, but I would imagine the same deal would apply if they did.

I agree that people efforts as employees should be rewarded via pay, which could for tax reasons included an element of pay-related share-holdings, but the bulk of net profits distributed should be the same amount each, because that component is pure inheritance.

what would you think if your employer put a third of their business in the hands of an inexperienced director fresh out of education

Owning a third of the shares does not necessarily mean you are a director, and if there is reason to worry that they will misuse their vote one could have some jiggery-pokery with share classes to prevent that.

A - 33.33%.
B - 20%.
C- 10%.

Parents retain the other 36.6666% and dole out when / if B & C hit the same service / contribution as A.

I like this idea.

I think you are B - much love to you. I'm very jealous you have something fab to inherit but I can see it doesn't come without its problems.

A has been paid for the work, so that balances a certain proportion. C can't help being younger so hasn't had time to build elsewh. I think all 3 should have an equal share as 'inheritance' but with salaries and compensation packages commensurate with experience and results.

Or yes, parents retain a share to go C later.

I think that the business ownership should be viewed as an asset in the same way any other assets of the parents would be divided. Doesn't seem fair to give A 50% and C only 15%. A's contributions can be recognised through wage. Otherwise it would be impossible for B & C to ever be on even footing with A even if they ended up spending the same proportional amount of their careers there and made the same contributions.

From a boring legal perspective, you need to think about who has control of the company. This can be different to the equity interests.

By way of example, shareholders with 75% of voting rights have control because they can change the company's articles of association, authorise certain actions etc.

Shareholders with more than 50% also have a certain level of control because they can pass other kinds of resolutions that affect the company's business (eg appointing or removing directors). They can also block ordinary resolutions proposed by other shareholders.

The other key point is about who is a director of the company - directors manage the day to day business. If all three are directors, it would require two of them to agree to pass a directors' resolution and outvote the third.

It is quite complicated, and it may be worth consulting a solicitor about it. By issuing different classes of shares it is possible to ensure that the three of them have equal dividend rights, but that they have different numbers of shares to which voting rights are attached.

Thank you so much for all of the replies. It is really helpful to hear the differing perspectives on this.

The whole thing is just not sitting right with me. To the extent that I may decline my share.

As Lily has rightly said, having this opportunity is great but will not be without its problems.

OP - what do you think should happen?

Even split between the 3 with salaries and bonuses that reflect length of service / experience etc.

I just can't get my head around it being fair any other way.

I would have thought 3 way even split is fair but entirely up to your parents.

Mmmm tricky.
I can't think of any totally fair way to split this - someone will end up feeling hard done by however you end up doing it.
It depends on so many factors - eg. other assets which you will inherit one day, the state of the business (large/small, profitable/struggling, growing/declining etc), he exact input of A, B and C in the future...
Instinctively the current proposed split feels wrong to me if the business is large/very profitable. (I'm guessing it is if you all now want to work there ). If so, your parents are effectively rewarding A for being older/working in the business for longer, despite the fact that A has already been handsomely rewarded for this. B and C are being penalised for having an alternative first career or being younger.
The cleanest way would be a three way split, but A could have additional pay/benefits/control to reflect their longstanding commitment to the business.

I also agree with previous posters that your family could pay for some decent specialist legal advice before doing anything. From bitter experience, if this is not set up properly from the start, you may have all sorts of problems later when (inevitably) you all disagree about how the business is being run.

OP how can you possibly feel it is right that C is an equal partner in the business to A? It's clear you aren't A.

In my opinion.

A, B & C are all employees with no share in the business. They have had salary in line with their input over however long they have been there.

It is owned by your parents and should be split equally.

C can be an equal partner, on a lower salary and benefits package. Only fair way.