MLR

Sibling teams: Pros and cons of the succession alternative

While raising children, most parents believe that equal and fair are the same. This means that children share the benefits provided by the family equally.

siblings at meeting

But when it comes to succession planning, this notion can actually be destructive to the business if some siblings actively participate while others don’t but expect to reap profits. In addition, the equal-and-fair notion goes out the window when the business is passed to one child selected due to birth order or gender. This can also backfire to the company’s detriment.

For example, the owner of one small electronics firm eventually had to sell because his son, while able to perform repairs and installations, lacked leadership and financial management skills. Any of his three sisters would have excelled in those areas. Perhaps a sibling team would have been a good solution to keeping the business successful and in the family.

The sibling team approach is gaining favor, especially among younger generations for whom teamwork is a familiar concept.

One major benefit of a sibling team is that the family can make up for individual shortfalls with the strengths of another member. Contributions to a team can also be part-time or full-time.

For example, in the business above, two sisters could have worked part-time in the business, one in sales and the other doing the books, since the business was small and the founder handled both tasks himself. Compensation can be set up commensurate with responsibility and effort. The tasks may not be equal but reward will be fair.

The notion of sibling teams may present another option to business owners who would like to keep the company in the family. According to the Family Business Institute, about 40 percent of owners plan to sell to outsiders. Over one-quarter of companies don’t have a succession plan in place. Both groups might consider investigating sibling teams as a solution.

The pros of a sibling team are the same as any succession plan involving relatives: relationships and baggage. How competitive siblings are with each will definitely affect how well they can work together.

Parent owners must scrupulously avoid making decisions that prefer any so-called favorites or conflict is inevitable. If one sibling has been active in the business and suddenly others want to get in on the action, it can be a tricky situation to negotiate.

Another key area to address is spouses and divorce. More than one business has failed when company assets are split during a contentious marital break-up. Bringing spouses or children in as employees without a process in place can also create havoc.

If an owner wants to create a successful sibling succession plan, it involves more than transfer of ownership. A strategic planning process for operating the business and setting up checks and balances is needed. During this process, it will become clear whether the siblings can indeed work as a team to the benefit of the company.

It’s never too early to start and better not to wait until a crisis. Using an outside facilitator – ideally a family business expert or other professional – can keep topics on key and discussion positive. The most immediate hurdle is for siblings to understand the opportunity inherent in their family business and how they can all benefit by working together.

Even if an entrepreneur operated very informally when starting the company, a family business in the next generation requires formal operating guidelines. It is in working out these guidelines that siblings will come to consensus. Areas to formalize include:

Code of conduct – This foundational document gets to the core of management philosophy and how owners will treat each other. Typically included are decision-making, conflict resolution, communication about the company to the public, ethics and relationships.

Participation agreements – It’s important to identify ownership, shares, disposal of shares, and procedures for bringing new people into the firm, including spouses and children. How profits and losses are split and how any non-participating members benefit should be included.

Operating agreements – An operating agreement delves into who is paid what, for what, how employees are hired, how finances are handled, and strategic business decisions are made.

Exit and estate plans – These documents provide for orderly withdrawal from the business as well as what happens if one of the siblings dies. Issues possibly caused by divorce need to be discussed and handled up front, especially in community property states.

In addition, the company should commit to full disclosure and transparency regarding financial matters. How do parental gifts outside the company affect inheritance of the business, if at all?

Use of an outside advisory board is recommended to keep matters on an even keel plus add another layer of accountability. It may not be equal but it is truly fair for the business to stick to agreements and operating procedures, with the result that all benefit.