April 25, 2017
You may have started your family business as a small venture and didn’t give much thought to nepotism. Then, you brought the kids on board and your brothers and sisters signed on. Perhaps the business continued to flourish with little conflict.
But sooner or later, some of those children and relatives are going to get married. And that presents the new challenge of in-laws.
Before hiring the spouses of family members into an established business, be aware that they can bring more emotional baggage than siblings and children. Even if they have great ideas for the company, there is a chance they can disrupt both the business and the family.
Ask yourself: What are the benefits and risks? The benefits are likely to be obvious: the individual has skills the business needs and can be trusted to do the job well.
But the potential risks should be examined too. For example, the person could wind up working for a spouse. The couple could bring their personal problems into the office. What if they divorce? An in-law could even turn out to be a better leader than the bloodline successor you have chosen.
Given the potential for problems, it’s generally considered a smart move not to jump too quickly into the in-law labor pool. When it comes to hiring individuals who marry into the family, here are some approaches taken:
1. A complete prohibition. This certainly eliminates potential complications, but it also rules out hiring talented in-laws who can bring fresh ideas to the business. Handled properly, in-laws can offer new perspectives that can break deadlocks that may have existed for years.
2. No restrictions. This opens up the possibility of getting stuck with an in-law who serves no productive function. You may find yourself under pressure to create a job the business doesn’t need just to hire your brother’s wife — because your sister’s husband is already on the payroll.
3. Hiring strictly by merit. Some families allow one spouse to join the business, but based on merit, not family ties. You can, of course, make exceptions for couples that meet at work and marry after both have worked in the business for several years and have established solid track records.
No matter which approach you take, there are potential pitfalls. For example, let’s say your sister-in-law has great computer skills that are in demand and she joins the family business. Your company benefits because it needs someone with her skills. But your sister-in-law left a good job or turned down a better offer to take the position. Later, she becomes resentful because she assumed she would play an active role in senior management — but those positions are filled. Eventually, your sister-in-law leaves the company abruptly for more responsibility elsewhere, creating disruption in the business and discord in the family.
Stock Ownership
Many family businesses allow only bloodline relatives to hold shares because that makes it easier to maintain ownership control and avoid problems in the event of a divorce, death or unforeseen circumstances.
Exceptions usually occur as the result of some extraordinary contribution to the company’s growth and success. It is important that everyone concerned understands that ownership and management are separate issues. When an in-law does perform admirably, one solution is to provide additional compensation rather than stock ownership.
When family members draw up their wills, they often ensure that their shares pass either to surviving children or to the company.
It’s a good idea for shareholders to have a prenuptial agreement and a buy-sell agreement, which exclude shares becoming part of a divorce settlement. Of course, before signing a prenuptial agreement, each spouse should be entitled to an attorney and fair disclosure.
A buy-sell agreement gives the company or the other shareholders the option to buy back family-business stock that would otherwise be transferred as part of a divorce decree.
© 2017