RUNNING THE “BLENDED” FAMILY BUSINESS

Running the family business can be difficult. Not only do you have to navigate the standard complications of dealing with partners and employees – but that partner may be your dad and the employee is your cousin. Trying to win an argument with your dad about why a new technology is needed or that the company should branch out in a new direction may bring along years of old hurts and experiences – has your dad gotten over you quitting that t-ball team back when you were 6 yet?

 

FAMILY BUSINESSES INCLUDE EXTENDED FAMILY IN THE BUSINESS

 

The definition of “family” today is even more complicated. The American Psychological Association puts the current rate of divorce at 40 to 50% of all marriages. With so many marriages ending in divorce, and many of those individuals remarrying and either starting families with the new spouse or becoming a step-parent through the marriage – today’s family businesses frequently means blended families.

 

Blended families are usually made up of parents who have remarried and include children (or even grandchildren) from different marriages — Mom and Dad could own the business together, they each remarry and new spouses have children from their first marriages, and so on. Throw a business into the mix and you have a situation where the family owns and runs a business that includes different business partners and family members.

 

LEGAL ISSUES FOR THE FAMILY BUSINESS

 

Let’s take this example. Mom owns a business, you (her daughter) have been working in the business for years and hope to take it over one day. Mom and Dad divorce. A few years later Mom remarries and suddenly you have 2 step-siblings. Does Mom’s Will leave the business to her new husband when she dies? If so, when Mom dies the business becomes the step-dad’s business – and now what does his Will say? Does he leave all his assets to his natural children? Say goodbye to the business then. Or does it divide the assets between all three of you? Suddenly you have two business partners you might not get along with or may have no experience with the business.

 

DIFFICULT DECISIONS WHEN RUNNING THE FAMILY BUSINESS

Every decision in a family business has lifelong implications to relationships in the family. Try firing your nephew and then having him and the kids over for the family’s Thanksgiving dinner. Won’t that be fun. Add to that that everyone is wearing a number of different hats. Are you talking to your Mom or your boss in this moment? Family dinner’s deal with business and family issues. Now bring your new siblings into this scenario. Are they coming into the business? It’s hard enough to get to know a new co-worker or train a new employee, but to also navigate the emotional impact of this person being your new step-brother adds a whole new level of complexity to this dynamic.

 

OWNERSHIP AGREEMENTS AND DISCUSSION POINTS FOR THE FAMILY BUSINESS

 

What to do? This is where careful planning comes into play – and yes this will involve difficult decisions and discussions. Be upfront about what you want. If you are Mom, let the new spouse know that you want to leave the business to your daughter. There are other assets that can go to the step-children to try to even things out with some careful estate planning and tax structuring (or maybe you aren’t concerned about that). If two siblings are running a family business they inherited from Dad, talk about what happens if one of you gets divorced and remarries. What does it mean to you to have a “family” business? Does that include step relations? What if they are young, are you ready to make that decision? Many family business owners feel that it is not necessary to have a formal shareholder agreement or operating agreement for their business. But careful planning, discussion terms for shareholder agreement or the operating agreement and setting it out in a formal ownership agreement using a family businesses law firm familiar with these issues is critical.

 

SUCCESSION PLANNING FOR THE FAMILY BUSINESS

 

Forbes recently announced that less than one third of family businesses survive the transition from first to second generation ownership. Another 50% don’t survive the transition from second to third generation. If the plan is to bring the blended family into ownership together, this becomes even more complicated. Here is where you need to consider an ownership agreement (Shareholder Agreement or Operating Agreement depending on your business structure). These agreements can set out how you make decisions together. Does majority vote rule or a higher percentage? Are there things you can do without checking in with the other owners (e.g. ordering office supplies) but other things that require a vote (e.g. increasing your credit line)? What happens to these owners when they die or become disabled and can’t work? Do they get to leave their shares to their kids (which may lead to further blending)? Do some shareholders have different rights than others? Setting guidelines for how you will work together can help to ease a lot of possible conflict further down the road. For more information on Succession Planning, see our blog article here.

 

CHALLENGES IN TRANSFERRING OWNERSHIP FOR THE FAMILY BUSINESS

 

Besides running the business, there are other things to consider. Is the business a marital asset? A pre-nuptial or post-nuptial agreement may be needed to keep the ownership interest out of a divorce contest. Drafting proper Wills, Trusts and the like is also important. Even if you aren’t running a business with a spouse or family member, these agreements may be needed. Think about it – do you want to suddenly be partners with your business partner’s wife?

 

PLANNING FOR THE FAMILY BUSINESS

 

No matter the situation, advance planning – making those difficult decisions and having those uncomfortable discussions – is the only way to reduce the risk of the business (or even the family itself) falling apart in the future. Successful blended family business planning is a matter of setting and communicating goals, learning the available legal strategies, implementing the proper documents and setting appropriate expectations for the family members.

 

FAMILY BUSINESS LAWYERS

 

The attorneys of Waltz, Palmer & Dawson, LLC frequently counsel family businesses and owners on these topics including running a blended family business, succession planning for the family business and addressing conflict among family business owners. If you would like to schedule an initial consultation to discuss questions you have about your business, please contact Waltz, Palmer & Dawson, LLC at (847)253-8800 or contact us online.

 

Waltz, Palmer & Dawson, LLC is a full-service law firm with various areas of service to assist your business, including: Employment Law, Intellectual Property, Commercial Real Estate, Litigation and general Business Law services. Individual services include Estate Planning, Wills and Trusts, Probate, Guardianship, Divorce and Family Law, Collaborative Divorce & Mediation.

 

This article constitutes attorney advertising. The material is for informational purposes only and does not constitute legal advice.

 

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