How to fairly take on a family business

19sparks91

Our parents run a holiday home business. In a few years they plan to hand over the properties to avoid inheritance tax. But they also want us to run the business side. 

It's relatively straightforward as there is a customer-facing lettings company too. Basically involves restocking consumables once per month, keep an eye on bookings maybe tweak prices occasionally, and once a year spend a week there doing basic maintenance/ redecorating etc. 

What I can't figure out is how to fairly split the profits (as dividends). We would each equally own 25% of the properties, but only 2/4 siblings would likely run the business side. 

If those two were paid for their time they would be incetivised to create more costs e.g. visit more often, find projects to undertake, spend more time on bookings. 

Therefore I think a profit share is most appropriate. But how do we work out a fair split recognising the extra work of two?

Keep_pedalling

Well I would have thought the people doing the work should be receiving a salary plus an equal share in the profits. 

When you say hand over the properties, do you really mean hand over the company or do your parents actually own these properties personally?

19sparks91

They own them too

elsien

You don’t seem to have a lot of trust in the other siblings, if you think they’ll deliberately be doing things to create more work for themselves. Not the best basis for the company moving forwards. 

Why are you the one figuring out how it might work? Should that not be your parents decision? 

lr1277

You and your parents may not want to hear the following but here goes.

My dad was involved in a family business that was divided further and futher as each generation emerged.This led to many owners by the time the business came to the generation in which my dad belonged.

For various reasons some people wanted to sell the business whereas others did not.The case for selling was because the business was no longer a viable concern. The business was not generating enough money to pay its costs. Others wanted to keep the business because it was started by their grandparents and great grandparents.

As there were many owners not all the owners wanted to put their hand in their pocket to pay these costs. There was also theft of product by staff. Also didn't help the business was in another country.

So my dad was doing all the work (and had done since he was a teenager) and all the others were reaping the benefits.Not that there was any money in the final years because as I said the business was not covering its costs.

Eventually permission was received from all the owners to sell the business which was done.

So I am not looking at this from a fair distribution point of view, but purely a view on how to manage the business so that it turns a profit. Yes it might be kind hearted to split the business between all the siblings, but that is no good for running the business especially when decisions have to be made and sometimes money found from their own pockets or even the business. In any multi-ownership model, some owners will want to spend money and others won't.

So my suggestions would be:

1) Sell the business  as a going concern and then split the profits after any taxes are paid. In your case that would also include selling the properties as the issues I mentioned above can also apply to properties.

2) THis might not be fair (but this is what the nobility did back in the day) but gift the business to one child and the other children would have to manage. The child who received the business could then pass the business onto one of their children, and so on.

So I suppose your family, especially your parents need to consider wether they want to keep the business as a going concern and if they do, the best structure to achieve their aim. Otherwise sell as a going concern.

HTH

Edited to remove an impractical 3rd suggestion

RAS

Rather than splitting the business, why not divide the properties between the children and let them run their own businesses?

Some will thrive, some might prefer to sell up and some might fail, but at least they have control over their choice

Keep_pedalling

19sparks91 said:

They own them too

Sorry, I am still confused. You talk about a business and dividends which indicates the properties are owned by a Ltd company, yet you say your parents actually own the properties. Which is it.

Keep_pedalling

RAS said:

Rather than splitting the business, why not divide the properties between the children and let them run their own businesses?

Might be difficult to do that if the properties are actually held by a Ltd co. Slicing the company up may also make the remnants no longer worth running. 

There is also the potential CGT issue on transfer and whether the parents are going to be OK with the loss of income after the transfer. Hopefully they will be taking financial advice before doing this.

london21

Might be difficult to run the business successfully and not damage relationships.

Hard for everyone to put in the same amount of time and effort.

Might be better to sell the business and split the proceeds.

Your parent’s decision and honest  input from all parties.

warby68

A common structure would be

Properties owned by the 4 siblings and rent is received for their use from the trading entity, usually a limited company.

The siblings that do the work can then be the shareholders/directors of the limited company and receive any additional profits. If it is felt that this gives 2 siblings too much, smalller shareholdings could also be given to the non active siblings.

It can get more complex over time if and when repairs and renewals are needed and who should pay for these. 

The posters above who say things get difficult with successive generations and more people with different motivations are absolutely correct.

Elliott.T123

It absolutely will get difficult and as most other posters have suggested the best option for keeping family relationships would be to sell either the business or the properties depending on how they are owned, split the profits and then each sibling can choose how to invest their money.

If you do choose to keep the business then the best way would likely be 25% ownership each so dividends are divided evenly but with the two siblings who are doing the work paid a salary from the company. If it is a set salary there is no incentive to do work that is not required as the salary will not change.

This will not be the most tax efficient method however but would be the fairest.

Still I think selling up and pocketing the money is the best option, or depending on the number of properties give one (or more) each to the siblings and sell a 5th one and use that cash to even out the value eg 3 properties worth £250k one worth 300k and one worth 150k. Sell the 150k, give siblings one each of the other and use the 150k to "top up" the 3 250k to 300k.