Setting Up a Business to Last

Brandon says his brother is going into business with their dad. His dad is concerned about leaving the business to his sons equally even though Brandon isn't going into the business. Dave explains how to handle it.

QUESTION: Brandon in Illinois says his dad owns a business, and his brother is going into business with their dad. His dad is concerned about leaving the business to his sons equally even though Brandon isn’t going into the business. Dave explains how to best handle it.

ANSWER: Family business experts teach a great way for you guys to look at this. You and your dad and your brother need to sit down and look at it this way. Take three circles and draw them overlapping to where all three of them have an intersection, and each of the other two have an intersection each—like a Venn diagram. One of those circles is the owner, one is the family, and one is the leaders in the business—management. You can be in the family and not be an owner or a leader. You could be in the leader circle and not be family or an owner. You hypothetically could be an owner but not be in the family or be a leader. In your case, you’re in two circles: the family and the owner circles. But you’re not in the leader circle. Your brother is in all three. He’s in the middle—the circle where they all three overlap. If we were to plot his point, it would land there.

When you separate that out, the owners get paid ownership rights only. The leaders get paid leader rights only. The way that works in the Ramsey family is the owners are the stockholders of the company, and the profits of the company are distributed to the owners. The people who work in the business are the leaders, and they get paid market rate for leading the business—not family rate, market rate. If they don’t lead the business, they’re family and if they just work in the business… I have a friend whose daughter is in graphic arts in his business. She gets paid for being a graphic artist just like any other graphic artist inside the business.

Your brother, let’s say he was a vice president or even the CEO of the business after it transitions later. He would be paid for being the president, whatever it’s worth to pay a president in the marketplace—not more because he happens to be a family member but market value. That would be my suggestion, and then he would also get paid because he happens to be a stockholder over there with you on the owner side. He’s getting more money out of the business, but by the way, he works over there every day, and you don’t. That’s fair. He gets paid his ownership share just like you do, but he also gets paid because he has a job there.

It’s very unusual to have the situation you have where if you don’t work there, you have no rights to the business at all. You don’t get to run the business—you don’t get to run down there and interfere as a shareholder. Shareholders don’t get to do that. They hire the president and the leadership team, who operate the business. It helps to separate out all of those concepts in your mind. It sounds like your family hasn’t by virtue of the way they have required that you work there in order to be a shareholder. There’s nothing morally wrong with it. It’s just a little confusing because you’re always going to have to sell out their shares. That’s going to put a constant strain on the business to be buying those shares.

I think what you’ve got here is something that’s going to strain succession at every generation. I think it’s a bad plan. That’s my opinion, for what it’s worth, and I’ve been studying this stuff really hard for about four or five years. What you’ve got to think about is what happens. Let’s go three more cousins deep—three more generations. You’ve got a nightmare on your hands. Or let’s say this business becomes unbelievably successful. If it can’t survive generationally and it can’t survive scale, it’s a bad system. I think you’ve got a thing that’s going to strain both of those. It’s going to be a huge strain with scale, and it’s going to be a huge strain generationally.

The owners have to really have real clear boundaries. They’re not down there picking out where we buy copier paper just because they’re stockholders. The people who pick out where the business buys copier paper come from the leadership team, which may or may not be run by family. Hypothetically, you could have a family-owned business where none of them work there. It’d be a little bit unusual, but that could happen.

That’s a huge concept, and it’s really a very basic concept—one of the first things you read and learn about as you study family business.