As a family grows in size its business can grow in complexity. Scott McCulloch reviews the key family business ownership models.
In your family business, who gets to be an owner?
It’s an important question to ask because when the time comes (and it will) there will be a change in ownership structure.
This process is called succession and it’s no secret that any enterprising family that hopes to remain so should have a plan.
We’ve all heard tales of aging CEOs who are reluctant to relinquish control of the business they’ve built from scratch.
Stories of “freeloading” family members, bitterly at odds with fully engaged family business members, are the stuff of legend.
Family Business Ownership
It’s ironic that family business ownership can be simultaneously a source of friction, identity, and purpose for families.
That doesn’t matter. What does are the ways to soothe nerves when it comes to changes in family business ownership.
We set up a family council, which helped
More than a decade ago, Roger and Lesley Gillespie, a couple who founded Australia’s Bakers Delight in 1980, transitioned their international bakery franchise into the hands of their offspring.
“The early days were easier,” their son Aaron Gillespie, president of COBS Bread, recalls. “It gets harder as you get to the crunch time.”
Today, Gillespie’s sister and brother-in-law are joint-CEOs of Bakers Delight, which expanded to Canada in 2003, under the COBS Bread banner.
“We set up a family council to oversee the ownership of our main business, which really helped,” Gillespie says.
Learn more about Aaron Gillespie and how he dealt with COBS Bread by watching this webinar episode "Ownership Transitions and Community Connections."
It’s just as well because ownership requires a set of choices. It is critical that families understand that there are numerous ownership options available. Failure to comprehend this can ultimately cripple a business. Here are a few ownership models.
Business Ownership Models
The basic model is the owner-operator model. For this to work across generations, a family needs to decide how an owner-successor is chosen in a way that is considered to be fair.
Then there’s the partnership model. This is a common model where only leaders in the business can be owners and benefit financially.
The partnership model can be effective in next-gen scenarios where, say, three daughters inherit a business from their father.
As next gens, they expand the firm they’ve inherited into an even bigger company. Their partnership works because each contributes equally. They draw the same salaries and profit perks. All is well.
Then the third generation comes along. Two sisters invite their sons to join the business but the third sister’s son is not invited. His mother rejects this and moves to prevent her sisters’ children from entering the business.
The partnership’s rules require owner consensus and the deadlock results in the sale of the business. It happens. Which brings us to the distributed model.
Had the sisters opted for a distributed model, where ownership is passed down to most or all descendants, whether or not they work in the company, the family business could have stayed in the family.
Distributed Business Ownership
The distributed model allows siblings to reconcile because all family can become owners while changes in compensation policy can reward those who contribute directly to the business.
The distributed model is popular but imperfect because family working in the business often disagree with family outside the business, especially on compensation and profit-sharing.
Fortunately, the nested model can help different family branches agree on joint and separate ownership of assets. This model, where smaller family ownership groups sit inside larger ones, is useful when conflict in preferences blocks decision-making on shared assets.
In this model, the family runs the core business as a profit-making operation and distributes dividends to the branches, which use the money how they see fit. The risks? Underfunding of the core business to finance the outside investments.
Last is the public model, where a portion of the shares are publicly traded. In this model, the family business behaves like a public company yet remains privately held. The business is run by professional managers and the owners play a minimal role.
Families generally opt for this model when the business requires a healthy chunk of outside capital or when owners are too numerous or not interested in active decision-making.
Family business ownership has many options. Explore them. Choose wisely and the rewards will come.