How to fairly take on a family business

lr1277

I suppose if the family do want to keep the business, I would keep the following in mind:

Decision making is vital. If you have 4 owners with equal shares, there is a strong possibility of deadlock. One way around this would be to give the 2 siblings working in the business 30% share each. The other 2 siblings would get 20% each. There might still be deadlock but less likely. I think you would have to have a legal document saying how decisions are made and what happens in the case of deadlock. When there are 2 decision makers (ie your mum and dad) decision making is a lot more straightforward. I would urge somehow to have a chief decision maker if you can come up with a structure that works for all of you.

Do the siblings want to continue the business? Will any of the siblings want to be bought out now or in the future? Will the income from the business be the main source of income for any of the siblings? If not, will it become a fall back position in the future? Is there enough money in the business when split 4 ways to financially support one of the siblings?

From my earlier post, I indicated not all family members wanted to pay the costs of the business. Unfortunately these were the same people who wanted the business to continue because it was started by their great grandparents. Which meant the family members who wanted to sell ended up footing all the costs. This was taken care of in the final distributions, but painful to go through.

I would advise only getting into the business if it excites you. If not walk away. Otherwise at times it might feel like your parents are controlling you from the grave. For the siblings who see it as a side hustle or a bit of free income, they may not put their full effort into it, thereby degrading the business, which does all the owners no good. Life happens! Circumstances change.

Some things for you to think about.

TripleH

If equal shareholding then dividends paid must be equal.

Unless you get an agreement for unequal allocation or change the share structure.

Best is to get everyone round a table for an informal chat first to discuss future plans.

Brie

I'd be concerned about the 2 not doing any work wanting to have an opinion on what is being done, why, how much it costs etc.  Personally I think it will end in tears.

RogerBareford

19sparks91 said:

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?

Your parents need to get their business head's back on and not just split the business four ways just to make it "fair" for their children.

If they want the business to continue then they need to choose one or two of you who are interested in that and hand the business over to you. If they are more concerned with it being fair then they should sell the business and split the money between the four of you.

If they split it four ways they are likely to cause issues in the future between you and your siblings.

Annisele

Is it the case that your parents own the properties as a partnership, and then your parents also own shares in the limited company that runs the letting business that operations out of those properties?

If so, this is likely something that your parents want to be taking paid for advice on (and they paid for advice might be a good idea even if I'm wrong in my assumption). It's entirely possible that they could do something that successfully avoids IHT, only to end up with a bigger CGT bill than the IHT bill would ever have been.

Given that they want to do this in a few years, it's also possible that a different business structure would be more appropriate - possibly even having the limited company buy the properties. But that's going to depends on all sorts of factors

19sparks91

Hi everyone, thanks for your useful comments, really enjoyed reading them. 

Just to explain a little better, it's actually only two properties but they are very large and you can close doors and rent them out separately and one has a cottage in the grounds etc. 

I understand completely the sell up and split equally strategy, nice and clean. However, few reasons why that's unlikely... my parents will never ever ever want to sell them; they do make a nice return; 3/4 siblings would probably prefer to have an investment rather than cash at this point; we sort of like the idea that we all share the risk/ reward whereas if we split it's a rat race against each other (competitive family!)

I like Elliot.T123 strategy to divide the profits equally, but pay the 'workers' a SET salary. Therefore they can't run up a big charegable bill, they will be incetivised to run cost effectively. Any suggestions o how to set that salary? Just base it on an average of our current salaries as that's what our time is worth, or base it on what a letting agent or similar charges? 

My parents are taking paid financial advice from a long standing adviser next month. I'm not entirely sure either on the best IHT/CGT avoidance, we'll see what they say. On the current operation, they own both properties outright, but all the rent goes into a limited company and they take dividends out of that - that's my extent of the knowledge at this point, it may be more complicated than that.

Back to working with siblings. I suppose with 2 properties and 2 workers, if 1 gets bored another could step in. 1 certainly has no interest, and would just happily take what comes their way. I agree with some comments and the 2 might have to take control of the decisions etc. That's what they would be paid the extra to do. For the other two, it would be like any stocks/ shares investment; you have a stake in the company and take dividends but don't have any decision making power.

At the moment, based partially on the strong staycation market the co has net (after tax) £1k pw. So whilst that would be very welcome (even split 4 ways) none of us would be quitting our jobs and relying on it. But also, if anyone did lose their job it would be a nice cushion. They would just have to accept like with shares if we have a big overhead (e.g. replace the roof) they may receive less or no dividend. 

I feel a lot more confident about this and would accept the role on the following conditions:
1. Profits are split equally between siblings 25%
2. Two siblings to manage a property each and be paid a fair set salary to encourage cost effectiveness.
3. Those two can make all decisions on their property and maybe collab on bigger spends/ projects. Reporting only basis to other siblings/ parents. 

Good strategy? Still crazy?

Keep_pedalling

I don’t really think you have a full grasp on the current set up, the properties must be owned by the company if the rentals are going into it rather than directly to your parents.

I have another question, if you parents hand over the company this presumably means they no longer have this income, what provisions have they made to make up for the loss of this?

MalMonroe

This situation is far from straightforward when you consider this sentence - " We would each equally own 25% of the properties, but only 2/4 siblings would likely run the business side." 

Each sibling owning 25% but only two of them running the business side? That's a bit lopsided. 

My last job before retiring was in a small company run by two brothers. They just could not agree on anything, although their participation in the business was split 50/50. I was glad when it was time to leave as the two brothers, very upsettingly, just despised each other and eventually had a terrible argument which ended up with them never speaking to each other. Ever. Now they've both retired but one brother's three children have taken over the running of the company and the other brother's children took their share of the business (goodness knows how they came to a decision on how to split the profits) and neither brother's family speaks to the other. 

With the best will in the world, I'm not sure it's ever a good idea to work with family. In this case, you appear to have taken on the role of self-appointed chairperson/director. How does your family feel about that? 

Rather than ask a bunch of strangers on this (admittedly, lovely!) forum, you need to sit down with your parents and siblings and talk about what each of you really would like to do. Although a very altruistic idea, it wouldn't really be fair if some siblings are contributing to the business and some aren't but everyone gets an equal share.

[*PS Sorry to appear pedantic but when you say 'incetivised' I think you mean 'incentivised'.]

RogerBareford

19sparks91 said:

Hi everyone, thanks for your useful comments, really enjoyed reading them. 

Just to explain a little better, it's actually only two properties but they are very large and you can close doors and rent them out separately and one has a cottage in the grounds etc. 

I understand completely the sell up and split equally strategy, nice and clean. However, few reasons why that's unlikely... my parents will never ever ever want to sell them; they do make a nice return; 3/4 siblings would probably prefer to have an investment rather than cash at this point; we sort of like the idea that we all share the risk/ reward whereas if we split it's a rat race against each other (competitive family!)

I like Elliot.T123 strategy to divide the profits equally, but pay the 'workers' a SET salary. Therefore they can't run up a big charegable bill, they will be incetivised to run cost effectively. Any suggestions o how to set that salary? Just base it on an average of our current salaries as that's what our time is worth, or base it on what a letting agent or similar charges? 

My parents are taking paid financial advice from a long standing adviser next month. I'm not entirely sure either on the best IHT/CGT avoidance, we'll see what they say. On the current operation, they own both properties outright, but all the rent goes into a limited company and they take dividends out of that - that's my extent of the knowledge at this point, it may be more complicated than that.

Back to working with siblings. I suppose with 2 properties and 2 workers, if 1 gets bored another could step in. 1 certainly has no interest, and would just happily take what comes their way. I agree with some comments and the 2 might have to take control of the decisions etc. That's what they would be paid the extra to do. For the other two, it would be like any stocks/ shares investment; you have a stake in the company and take dividends but don't have any decision making power.

At the moment, based partially on the strong staycation market the co has net (after tax) £1k pw. So whilst that would be very welcome (even split 4 ways) none of us would be quitting our jobs and relying on it. But also, if anyone did lose their job it would be a nice cushion. They would just have to accept like with shares if we have a big overhead (e.g. replace the roof) they may receive less or no dividend. 

I feel a lot more confident about this and would accept the role on the following conditions:
1. Profits are split equally between siblings 25%
2. Two siblings to manage a property each and be paid a fair set salary to encourage cost effectiveness.
3. Those two can make all decisions on their property and maybe collab on bigger spends/ projects. Reporting only basis to other siblings/ parents. 

Good strategy? Still crazy?

Splitting a company that only makes £1k a week four ways between family still sounds a bit crazy to me. It's a nice income for one of you or maybe two if needed but it's not worth the hassle if it's being split between four of you.

Your parents might not want to sell them but once they transfer the business into your names then you can all decide to sell them anyway.

TripleH

You can only pay dividends if the company has a profit. Paying a salary to those who work in the business is a good way of rewarding those that put more effort in.

Your parents can sell the properties to the business.

You can have different shares for parents to children.

But the independent financial advice can go through all options like this.