Wealth Allocation: Hold, Divide Or Multiply?

Richard Shrapnel's Orienteering Succession blog

What choices do you have if you believe the members of the next generation simply cannot get along? The wealth allocation strategy may come down to involve hold, divide or multiply.

 

Active Knowledge Question:

Have you thought about what you would do if an all-out battle broke out between some of the next generation for control of the family business?

 

It may seem unimaginable to you at this time that your children would resort to battling each other for control of your businesses. However, it has become a reality for some families. We all know that wealth can corrupt people. We just don’t think it could ever happen to our family.

Of course, it can be simpler.You may just believe your children will not be able to work effectively together in managing the businesses. It could be a case of management styles or personality differences.

The question then becomes one of what you can do to overcome this possible impasse in a manner that will uphold the cornerstone goal of succession. This being ‘to enable the compounding of wealth from generation to generation while ensuring family unity, individual growth and a sense of contribution.’

In one of my earlier posts, ‘Who Should Own The Business?’, we considered the various options in dealing with a business in succession. This included to:

  • Sell the business outright to a third party.
  • Sell the business outright to a family member/s.
  • Transfer the business to the next generation.
  • Transfer the business to only some of the family members in the next generation.
  • Break the business up and deal with the parts under any of the above options or combinations.
  • Publicly list the business with the family retaining some ownership, possibly even a controlling interest.
  • Use the capital raised from the above options to seed new business ventures.

If the sale of the businesses is not the preferred option, then there are alternate ways to approach the problem. Fundamentally, I believe there are three ways to approach the continuity of your family businesses. They are to:

  • Hold.
  • Divide.
  • Multiply.

To hold it, you keep all the businesses together and seek to put in place a governance mechanism that will allow the businesses to continue to trade well, while managing the next generation’s differences through the governance process. My post,‘What Should Be In A Shareholders’ Agreement in A Family Business?’,will assist you in this respect.

To divide it, you break the businesses up across the various next-generation family members in a manner that you believe will overcome the possible conflicts. This is my least preferred option, however, I have seen it work well when this division was combined with an alliance agreement that saw the respective businesses continuing to work together.

To multiply it, your focus is on what will allow each of the businesses to succeed to their greatest extent and put in place the ownership, governance, and alliance agreements that will support that outcome. In this outcome, you are focused on the compounding of wealth across generations, through the growth of the businesses and ‘requiring’ the next generation to support this outcome.

 

Leadership and ownership of the family businesses by the next generation can, at times, become a power struggle. Keep your eyes and ears open to this possibility and proactively address the risk.


 

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All the best in the success of your business,

Richard Shrapnel