“I'm your older brother, Mike, and I was stepped over!”
“That's the way Pop wanted it.”
“It ain't the way I wanted it! I can handle things! I'm smart! Not like everybody says... like dumb... I'm smart and I want respect!”
—Fredo & Michael Corleone, The Godfather: Part II
For centuries, scholars, business owners and society have debated about how we can decide what is fair and how we can develop a fair process. After all, how can we possibly consider all the factors involved in being fair? What factors should we ignore or prioritize? Do we look to the past to determine who should be rewarded in the future? What happens if our outcome is different than what we had anticipated? Do we try to modify something else to address the unintended result?
Let me illustrate with a simple example. Imagine a mother has one candy bar but two children, Kate and Alex, who both want it. The mother decides a fair process would be to flip a coin. Since each child has an equal chance of getting that candy bar, the mother can’t be criticized for any favoritism. However, when Kate wins the candy bar and Alex does not, Alex will almost certainly argue the process was not fair.
The next day, the mother has another candy bar. Should she maintain the same coin-flipping process so each child has an equal chance of winning? Or should she change the process to equalize what had happened the day before? However, if the mother decides to change the process and give today’s candy bar to Alex, Kate may argue that changing the process at this time is unfair.
Would it have been fairer if the mother had merely split the candy bar in half and given half to Kate and half to Alex? What if Alex had just returned from a friend’s house and been given the exact same candy bar a few hours earlier? Or what if one child had done something to merit a candy bar while the other had spent the day misbehaving?
These simple examples demonstrate that determining what is fair is not as easy as one might initially think. As a business owner, you will also need to consider how or if you will want to address the thorny area of “fairness” when it comes to your business’s transition process.
I’ve heard many clients tell me they want to be “fair” to the next generation. In the same conversation, they will tell me that, in order to be fair, they want to treat everyone equally. In other words, they believe that by treating everyone equally, they are inherently treating them fairly.
In fact, a 2018 Business Owners’ Perspective study by MassMutual found that 60% of business owners want to split their assets equally among their families. Beyond this, for 64% of business owners, the business is the largest asset they have. From these statistics, it appears that, unless there is only one child in the family, multiple children will own the business interests of the senior generation.
While the decision to transfer ownership in a business is ultimately the owner’s decision, it is important to recognize the differences between fair and equal. After all, how the business owner decides to transfer his or her business interest and how the transfer is viewed by the next generation can materially impact the likelihood of a business’s successful succession.
To add to this challenge, many business owners find that the next generation of family members often each have their own definitions for what is “fair.” These various family members may not believe that dividing assets equally means that they are being treated fairly, or that their parents are acting fairly. For example, think of a next-generation family member who decides to come into the family business and sacrifices his or her other dreams for the sake of the family business. Later, the parents tell this family member that they want to be fair to all their children and think the business should be divided equally among all the siblings. Do you think the child who has contributed years of service will think he or she has been treated fairly?