Family businesses and the children who do not work there

A business owner with several children, one of whom works in the business, faces a genuine problem: the business may be most of the estate, and dividing it equally is generally the worst option available.

Why equal division fails

Leaving the business equally to children where only some work in it creates a structural conflict.

Those working in it want to reinvest, take reasonable salaries and build long-term value.

Those not working in it want distributions, and have no way to realise value otherwise, since minority interests in private companies are effectively unsaleable.

Each side regards the other as unreasonable, and both positions are coherent.

The pattern is well documented and it is one of the more common causes of family businesses failing in the second generation.

The distinction that helps

Between equal and fair.

A child who has worked in the business for fifteen years, frequently at below-market compensation, has contributed to its value.

Treating them identically to a sibling who has not is arguably not fair, even though it is equal.

Conversely, a child who receives a valuable business while siblings receive little is receiving substantially more.

Most workable solutions are attempts to separate the business from the value.

The mechanisms

Life insurance to equalise. The most common solution.

The business passes to the child who runs it, and a life insurance policy provides comparable value to the others.

This works well where the owner is insurable and the premiums are affordable, and it depends on the policy being maintained for decades.

Non-business assets to other children. Where there are sufficient other assets, which is frequently not the case.

A sale to the successor child, with the proceeds forming part of the estate divided among all.

This can be structured as an instalment sale funded from business cash flow, and it has the advantage of requiring the successor to commit rather than simply receive.

It also requires a defensible valuation, since a sale at below market value is partly a gift with tax consequences.

Voting and non-voting interests. The successor receives voting control while others receive non-voting interests entitling them to economic participation.

This separates control from value and it leaves the non-participating children holding illiquid interests, which addresses the fairness question and not the liquidity one.

A redemption obligation, requiring the business to buy out non-participating siblings over a defined period.

This provides an exit and burdens the business with an obligation that may be difficult to sustain.

The questions that come first

Before structuring anything.

Is the successor genuinely capable and willing? This should be tested rather than assumed, ideally through working outside the business first and then holding real responsibility within it.

Do the other children want anything to do with it? Frequently they would prefer clean separation, and asking directly resolves a great deal.

What is it actually worth? Owners consistently overestimate, and an independent valuation grounds the whole discussion.

Does the owner need income from it? Where retirement depends on continuing payments, the structure must accommodate that alongside everything else.

The conversation

The most important element and the one most often avoided.

Family business advisers consistently report that disputes arise less from the arrangement itself than from its discovery.

A family meeting during the owner's lifetime — explaining the intention, the reasoning, and the mechanism — removes the interpretation that the division reflected differing affection.

It also surfaces objections while they can still be addressed, which is considerably better than after death.

These meetings are uncomfortable and are consistently identified as the highest-value step in family business succession.

Governance during the transition

Worth establishing formally.

Clear roles and reporting. Documented compensation policy, so that family members' pay is defensible. A board or advisory group including at least one person who is not family. And a written statement of how decisions are made.

These reduce the ambiguity that family conflict grows in, and they make the business more valuable and more transferable regardless of who eventually owns it.

General information only, not legal, tax or business advice. Consult qualified professionals about your own circumstances.