Last month, I took out my three kids along with their mother to have a pizza. At one point, there was only one slice left of the pizza. Their mother divided that slice into three parts and gave it to them.
In my estimation, the way she divided that slice was not the right way, and I questioned her about it.
She explained that the youngest one has a tendency to waste, so she gave her the tiniest but cheesy one. The middle one has car sickness, so she gave her the crust parts which were basically full of bread.
Her idea was if she would have given him a little more, he would vomit in the car, so why waste it? And the grown up one got the full balance of both bread and cheese he/she can handle that. To me, it is totally not fair but a very logical process to arrive at the best outcome scenario.
With keen interest in family business practices, I started thinking and questioning my wife's way of dividing that pizza slice. Many of the world's most successful businesses are family owned and passed through generations. The succession is often marked by the threat of family bust-ups, sibling rivalry and petty jealousy.
In general, the dream of family-owned businesses is to pass their company on to the next generation, who will use their collective talents to grow and develop the business. One or more of the successors will demonstrate the ability and desire to follow in their predecessor's footsteps.
Even if not all of the children will be directly involved in the family business, most parents want them to share the profits. The dilemma then becomes how to appropriately split the family business between participants and non-participants.
The most straightforward method is pro rata, in which everyone receives an equal share of all assets related to the family business. However, this is not necessarily the best or even the only option, especially when there are some interests associated with the business and within the operation of the business.
For example – the present workforce may not accept the leaderships or strategies from the next generations. They might not accept the ideas of how to handle the present liability or owed estate tax issues of the older generations.
Now, if you consider the non pro rata ownership structures for family businesses, there are three essential areas to consider: present operations, real estate, and prospective future businesses.
It is usual for parents to delegate management to those children who are more involved in the business, while maintaining pro rata ownership structures for the company itself. Family members in management may receive bonus compensation for their successful endeavors just like any other office executives, but they may possess a larger share of the company's equity.
Some families choose to provide family members, who are also the company officers, more equity ownership. How? For example, the parent company may develop another sister concern or business where one child may get the shares and thus in such enterprises that member may get greater equity.
Meanwhile, here in Bangladesh the general concept in play while transferring company leadership is- the older children are stronger but the younger ones are favourites. So, with a belief in such phenomena, some dissatisfaction may have originated, and a hint of "envy" might be generated by seeing the leadership in present operations without considering the benefits in non-related business or the liability gained from the business itself.
But the founder entrepreneur's business is an extension of himself. He wants his legacy to continue for which he sometimes is biased towards his belief in deciding the capable one, but again things get complicated when spouses of each sibling start having stake in their partner's positions and fantasies themselves.
If the firm owns real estate that may generate revenue or increase in value, it can be an appropriate asset to give to children who aren't involved in the day-to-day operations in the business but still want a piece of the family's success.
There might appear another problem- dividing the entire worth of the firm equally among the successors, despite the fact that they hold quite different assets that are valued differently. Furthermore, because the way enterprises and real estate fluctuate in value over time varies substantially, it is critical to consider future situations.
Again, a child who is not interested in managing the family business may choose to start their own firm, whether it be a spin-off from the family business or a completely new venture.
In this case, it is crucial to think about how much of the new business belongs to the parents and how that can affect future estate taxes. The less the parent's company owns at the time of death, the less it has to bear the tax liability of the new venture.
The new business ownership can be structured in such a way where it does not appear on the parents' financial statements when they die, and they do not have to worry about transferring it as a gift throughout their lives.
One simple approach to accomplish this for the parents is to use a low-interest loan to support the new business. This way, the new venture that their child has opened, will be able to pay back the loan and thus the parent company will not hold any liability when the loan is paid.
Impartiality is more important in family enterprises than they are in the general commercial world. Families may keep more of their assets, recognise children's talent and effort, and maintain harmony with open communication, the correct ownership structure, and a little inventiveness.
Parents always recognise the "weaker" and the "stronger" children. And they intend to groom their "stronger" ones to manage their business along with giving shields to the "weaker" child.
And sometimes, the "stronger" ones who do not want to be cuffed by the "weaker" ones. And if all these hypothetical scenarios really happen, it is better for the family business to split up and enable that slice of the pizza to grow and become an entire pizza itself.
Although It may seem challenging to cope with the problems of the family business, that does not mean, however, that one should merely go through them. It depends on the family members, they can solve these issues their own ways.
Splitting to grow can be better sometimes. We can consider successful examples from our neighbouring country India's family-owned business – the Bajaj, the Zindals, the Munjals or the Birlas. They all grew exponentially after their split ups. For Bangladeshi family managed businesses, these cases can be the learning on how to split up, if that is what they intend to.
Dr Mohammad Naveed Ahmed is the Managing Director of Miyako Appliance Limited, Bangladesh. He also teaches at East West University. He can be reached at firstname.lastname@example.org
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.