Case study: equal vs. equitable - dividing shares in a family business

Nation's Business, April, 1996

"Originally, Dad gave equal shares of the business to my brothers and me," says Ann Bradshaw-Harper, 62, "and now my family and I are paying the consequences."

Ann's father, Will, expected his older son, Jack, to succeed him as president of Bradshaw Garage Door Co. When it came time for Will to retire, however, first Jack and then his brother, Dick, both of whom had jobs in other cities, refused Will's invitation to rejoin the firm. They had bitter memories of working during summer vacations for their demanding father.

Although Will often looked to Ann for support, it never occurred to him to consider her as his successor. Instead, he persuaded Ann's husband, Jim, to become president.

Over the next 30 years, Jim built an even more successful company Before his death, Will rewarded Ann and Jim with additional shares of the business, giving them controlling interest while Jack and Dick continued as minority absentee owners.

Two years ago, Jim retired and named his and Ann's son, Peter, as his successor. The company has done well so far under Peter, and now Ann and Jim plan to transfer a portion of their shares to him. Jack and Dick are protesting, however. "Peter doesn't have that much experience," says Jack "Dick and I feel like our interest in the business is in jeopardy"

Says Ann: "Most professionals advise business owners about the dangers of giving stock equally to all children regardless of their involvement in the business. But what do you do when a founder at first gives equal shares to each child but later gives additional shares to one who is active in the business? How can we help Peter continue to have a fair chance to succeed and resolve the issues with my brothers?"

Time Has Altered The Circumstances

Jim, Ann, and Peter have earned the full benefits of Will's legacy. If Jack and Dick believe their birthright is threatened by Peter's assuming the chief executive's position, they are simply 30 years too late.

As siblings, Ann, Jack, and Dick share an emotional reality that is frozen in time. Because of their long involvement in the company, Ann and Jim have won the right to name Peter as the third-generation leader of the Bradshaw business. Peter has proven he can be successful in this position, and he will have a fair chance at further success if he is not saddled with absentee owners.

To promote peaceful co-existence among family members, Jack and Dick should have the option of converting the fair market value of their shares into cash, through a stock redemption. This would allow them to sever their ties to a business that, over the past three decades, has evolved from the Will Bradshaw family business to Ann and Jim's family business.

To facilitate the stock redemption, the company could obtain bank financing to enable it to purchase the shares owned by Jack and Dick. Or the brothers could take notes for the value of their shares, payable periodically over a reasonable period at a market rate of interest.

Wanting to be fair, Will initially gave equal shares to his three children without first determining whether they would be active in the business. He partially corrected the action, however, by giving controlling interest to Ann and Jim before he died.

Brothers Are Still In The Minority

Many sons and daughters choose not to work in the family business because of early negative experiences. Desire can be curbed by parents' dinner-table complaints about a business or by the difficulty of working with an authoritarian parent.

Jack and Dick chose not to join the business. Ann's family, as a result, has attained both leadership and dominant ownership, to her brothers' increasing distress.

Ann's concern about family harmony is an example of the sound judgment and generosity of spirit that Will saw in her--traits worthwhile and necessary in family firms.

While minority stockholders do have significant rights, they are nonetheless in the minority Ann, Jim, and Peter control the company. There is nothing to indicate involvement by anyone in Jack's or Dick's families.

Ann is correct. Owners are well-advised to distribute stock equitably, not equally, to their heirs. It seems that her father eventually did this by conveying control to her family, the Successors.

The brothers should request establishment of binding guidelines on the distribution of future profits to minority owners. A policy should also be established to determine how and if any of the brothers' heirs can enter the business.

Or the brothers could agree on a long-term buyout of their shares, from profits of the majority stockholders.

Direct and clear communication during this stage is needed to ensure that the family does not fall apart over this sensitive issue.

This series presents actual family-business dilemmas, commented on by members of the Family Firm Institute and edited by Georgann Crosby, a consulting partner in the FamilyBusiness Roundtable, a consulting organization in Phoenix. Identities are changed to protect family privacy. The authors' opinions do not necessarily reflect the views of the institute. Copyright by the Family Firm Institute, Brookline, Mass.