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!!

Yellodraw
They both had the chance to get in on the family business and embark upon a path which (subject to father being satisfied that they were competent) would have seen them become equal partners with me.

They chose not to, ads is wasn't business minded at all and DB buggered off round the world partying for about 3 years at one point (as I said before he hasn't always been the reliable and steady sort).

DB is in advertising now, has settled down and lives in the USA , Dsis is in London, is very high up at a prestigious educational institution and earns very well indeed.

They both have extremely nice places bought and paid for by the estate and are happy with their allowances as they are.
They were set up as they are to encourage them to aim high rather than 'settling' for a mediocre not too demanding job just to get their hands on their allowances.
Rightly or wrongly we come from a background where success in your career means being a businessperson, doctor, lawyer and 'settling' for a £25k 9-5 job would have not been accepted.
I hasten to add that while I share many similarities with my parents, this is not a line of thinking I agree with. I don't care what my children do so long as they're happy and fulfilled by it.

I have been A in this scenario and in preparation for the business to be split A, B & C were all on the same salary. However I was the driving force and had more shares already, plus had earned more from the business in the 20 years I'd worked there.

We chose to sell out and not to split the shares and keep going when our parents wanted to retire. With the benefit of 10 years hindsight all 3 of us would agree that it was the best decision we ever made.

Our proceeds from the sale were not equal due to share distribution, which was fair and nor contested by B or C

Enid - This is what is worrying me. It's almost as if we are being set up to fail in a few years time (by fail I mean in a sibling relationship sense).

MrsRyanGosling - Because our parents have devoted their lives and what should have been their retirement (still working) building a business that is intended to support all of us. It's not C's fault that they were born years after A. C (and B too) can never be as successful as A in this business with the current proposal.

You are quite right, I'm not A. So that makes me B .

Sorry sparkles I don't quite understand from your post how you did it? How did you split the shares? (If you don't mind me asking!)

We didn't split the shares, we sold the business DP kept the proceeds from their shares around 60%, I had 20 and my siblings 10% each. But if the sales hadn't gone through the shares my DP owned would have been split equally giving me overall control.

There's ways round given all three equal ownership with different rewards or levels of control.

Maybe some kind of employee share scheme could be set up so that after a certain period, more shares are transferre to b & c, with a view to them all being on an equal footing in the end? This gives them a chance to 'prove' themselves.

Or your parents could keep all the shares for now, and just have you three as directors.

The split shouldn't be totally equal but should be a lot closer to equal than the current proposal.

The problem is that the current proposal is trying to do two separate things - share out what is effectively your inheritance (or part of it) and give reward for labour. It shouldn't be trying to do both. Salaries and bonuses are the appropriate reward for labour.

However a small inequality is a good idea in the event of future disagreements - so I would suggest A gets 35.5%, B gets 27.5%, and C gets 22% - the parents keep 15%.

Then in the parents wills, they re-equalise. Depending on how things go with the business over the next hopefully at least two decades if they are healthy. They could leave their 15% to B and C to even them all up (taking each to 32.25%), leaving other assets or cash to A and making the business a pretty much equal partnership. OR they could leave their 15% to A, leaving other assets or cash to B and C, so that A has the controlling interest.

Depends on the nature of the business too. Is there a lot of capital in the business? Could you sell it for a lot of money or is it a service type thing with just contacts and goodwill to sell?

I would say that shares should be equal and salaries reflect input.

I'm not sure how relevant the past contributions of A were. Leaving aside the family dynamics, presumably they were paid a salary that reflected their contribution and importance to the business and had with it an assumption that they'd grow it? A has done their job and done it well by all accounts, but that's no more thanwhat was expected of them and their reward has been more than adequate (by the op's account) salary to reward them for this. How long would anybody last in a senior sales/director role if they hadn't achieved growth?

The salaries and positions held by the siblings should reflect their abilities and contributions, but the share of the business shouldn't.

Cex - You've hit the nail on the head, it's trying to do two very different things at once - reward labour AND share out inheritance. Thank you. Parents have other assets which will be split equally three ways as far as I'm aware.

Tinkly - Yes it could be sold for a good amount of money and would have been by now had it not been for the fact that A would be put out of a job. A has nothing to fall back on. I have a career I can return to if necessary. Our parents have sacrificed a lot to keep the business up and running vs simply selling it and enjoying retirement.

In a sense you could argue that A has done better out of the business than B or C. A hasn't had the expense and commitment of further education or training and was earning a decent whack whilst you were training/developing a career.

Yes they put more in than B or C but they've taken more out too.

Just spoke to my husband who is a corporate lawyer for his views!(And who would be happy to send his details!!!!!!)

He comes across this a lot with family owned businesses.

Quite often it is dealt with by dealing with the equity on sale of the business as one event and profit share dealt with differently.

Example,

If the business was worth £1m when A started in the business and is currently worth £5m and he was instrumental in that growth it may be worded in a way that if the business were to be sold A would get the first £4m (ie the increase in value he generated) and the remainder (ie the initial £1m and any further growth) would be split 3 ways.

However whilst the business was retained profit could be split equally between the siblings after the parents share and any anomalies in input dealt with by differing salaries/dividends.

There used to be a programme on BBC2 called Where There's A Will which dealt with difficult family/business situations and quite often the issues were resolved by sensible conversation round a table with the help of the expert. There was one where there were 2 sons that worked in the farm (which they had grown in value massively) and a daughter who had never worked there but it was resolved by her getting a small share in the farm but a greater share of other parental assets (such as other properties).