Should family members not working in the business ever be owners?

Chris Eckrich
Chris Eckrich

Recently at a seminar a well-respected advisor proclaimed that any succession plan that allows stock to pass to those not working in the business is a bad succession plan.  For anyone who has experienced family dissension or destruction over conflict between those in and outside of the business, this certainly will sound like sage advice.  But, while this may seem sound advice for a smaller business where there is little chance for significant reward beyond that which can support a single owner or that owner’s family, the issue is a bit more complex where larger assets are involved. 

If the business is successful over time and grows large enough, there is an opportunity for building an enduring enterprise that creates both career paths for those working in the business, and returns (in the form of investment appreciation and dividends) for those who are not working in the business.  Furthermore, an aligned ownership group can support growth models with the patient capital approach that is a competitive advantage for family firms.  When combined with a liquidity policy that allows for the voluntary buyback of a small percentage of shares on an annual basis, the shareholder tree can be slowly pruned over time, increasing the likelihood of a unified shareholder group.

If we think of a family business in terms of a snapshot in time, it does seem logical to keep the family business in the hands of only those employed in the enterprise.  But if we take a longer-term perspective, this decision may exclude the possibility of a family enterprise that ends up being governed by owners with independent directors serving along non family executives in building the business.  Or, we may open ourselves up to the possibility that a next generation leader will come from one of the branches that might otherwise been prevented from ever owning the business.

One size does not fit all when it comes to family businesses.  Each family must decide what path to pursue in terms of who can own the business, and all options should be considered in the decision-making process.

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