Breaking up the family business

June 4, 2009: 4:45 PM ET

If the problem of too many owners is killing the business, it's time to restructure.

Kelli, Bishop, Calif.
How hard is it to split a family business? A mother and three siblings each own 20% of the business but the siblings don't get along at all.


By Emily Maltby
, CNNMoney.com staff writer
First, decide if you are splitting the business solely as an asset or as a tool to seek revenge.

"If it's the former, it's much simpler," says Ted Clark, executive director of the Northeastern University Center for Family Business. "As an asset, you need to engage a marketing and research company to create the greatest value, and then sell and split the money. But unfortunately, it usually doesn't work like that, because the families are emotionally attached to it and want something more than just the money."

For example, one sibling may feel entitled to more than 20%. Another may not want to sell the company at all but sees it as the only solution to the family conflict. For everyone to come away happy, there needs to be a mediator.

"Try to get a third party to open the lines of communication," suggests Clark. "Find a professional who everyone can agree is neutral so that no one feels that party has favorites."

Small business center mediators are trained to get to the bottom of the family problems and keep the mistrust among siblings at bay.

When picking your outside referee, evaluate how well she understands your specific industry and your region. A CPA or valuation expert can help put a price tag on your company, but you'll need someone who is familiar with your industry and region and who can accurately assess your assets, cash flow, branding and local competition.

After you have a valuation in hand, you'll have two options, says David Goad, President of Succession Planning Consultants.

The first is the internal model, where certain current owners stay in management and run the business. In this case, it's best for those members to buy out the other members, using the valuation set by an outside professional.

The second, external model, is useful when none of the current members want to work in business anymore. That means putting the business up for sale to an investor or a competitor. This is a good time to get a business broker involved.

Keep in mind that many business sales deals carried out through payments on an installment note, rather than a cash buyout. If you decide to go with an internal arrangement, keeping some of the family members with the company, Goad recommends talking to your accountant about integrating a "self-canceling installment note" (SCIN) into the deal. SCIN is an arrangement used in many family business situations because it allows the deal to be cancelable at the death of the payee.

"The entire balance due becomes forgivable and no further payments are due to the seller's heirs or estate. Also, when properly planned, neither the value of the business or promissory note is subject to estate tax at the seller's death," says Goad.

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