Succession is an emotionally charged process for any family that values both the success of the business and family harmony. If one child takes over, what happens to the others? How can children who inherit passive ownership feel they’ve been treated fairly? And how can they remain connected to the family’s legacy without creating tension or interfering in daily operations?
These questions sit at the intersection of family and finance, love and legacy. It reflects a grantor’s deepest desires: to protect the business they’ve built, to be equitable to all their children, and to prevent the wealth that was meant to be a blessing from becoming a source of division. The fear of getting it wrong (of inadvertently creating resentment between the children) is profound and entirely justified.
The Understandable First Step: The Balance Sheet Solution
When families bring this complex challenge to advisers, a common piece of advice is to equalise inheritances with other assets or life insurance. Another is to establish a clear shareholder agreement that defines the roles of active and passive owners.
Let’s be clear: this advice is sound. It forms the financial and legal foundation that families need. Equalising inheritances with outside assets offers a tangible sense of fairness. A well-drafted shareholder agreement sets clear boundaries and defines rights. Together, these tools add structural integrity and form an essential part of responsible planning.
When the ‘Balance Sheet Solution’ Falls Short
However, the uncomfortable reality for many families is that this advice assumes a reality that doesn’t exist. For a significant number of family enterprises, the business is the estate. Decades of an “investment ethic”—ploughing cash flow back into the business for growth—means there often aren’t sufficient liquid assets to truly “equalise” the inheritance without crippling the company.
Selling the business or carving it up to distribute assets would destroy the very engine of the family’s wealth and the heart of its legacy. The patient capital that fuelled its growth cannot be easily liquidated without sacrificing its long-term viability. Therefore, keeping the business whole isn’t just a preference; it’s often the only viable path. This transforms the problem from a simple division of assets into a far more complex challenge: how to manage shared ownership across diverging roles and contributions.
The Uncomfortable Truth About Equality vs. Equity
The main issue is a frequent confusion between two distinct concepts: equality and equity.
- Equality aims to give everyone the same thing. It’s a mathematical division that looks perfect on a spreadsheet. In this context, it means giving each child an inheritance of identical monetary value.
- Equity, or fairness, strives to give everyone what they need to be successful and feel respected in their unique role. It acknowledges that different contributions, risks, and responsibilities cannot be treated identically.
An “equal” distribution can breed resentment in the active heir, who invests their career and takes on daily operational risks, feeling their sweat equity is unrecognised. It can simultaneously frustrate passive heirs, who may feel their “equal” inheritance is illiquid, opaque, and controlled entirely by their sibling. This tension creates a dangerous dynamic. To sustain the family legacy, the business must remain competitive and innovative. This requires having the financial room to invest in the future. If passive owners, seeking fair returns, demand high, regular payouts, the first budget to be cut is often long-term Research and Development. This starves the company of its ability to adapt, ultimately eroding its value.
The Hidden Risk: Agency and the Sibling Partnership
This divergence in roles naturally gives rise to a classic business challenge: the Agency Problem. In this scenario, the active sibling acts as the “agent,” making daily decisions for the business, while the passive siblings are the “principals” or owners. The risk is that the agent’s interests may not perfectly align with the principals’. The active manager might be incentivised to reinvest heavily for growth (delaying dividends), increase their own compensation and perks, or pursue passion projects that don’t maximise shareholder return. For the passive owners, this creates a situation of high trust but low control, a fertile ground for suspicion and conflict. The platitude of simple equalisation fails because it solves a maths problem while ignoring these human and structural risks. The real goal isn’t perfect equality; it’s durable equity.
The Better Recommendation: Building an Architecture for Alignment and Equity
The answer is not to set aside legal and financial tools, but to strengthen them with an interpersonal system designed to reduce agency risks. This shifts the approach from a static solution to a dynamic one. It requires a governance framework that brings the shareholder agreement to life, aligning interests and creating a shared understanding of responsible ownership.
- A Forum for an Owner’s Voice: The Family Council
Passive owners meddle for two primary reasons: fear and a feeling of powerlessness. A Family Council serves as a crucial platform to address this by providing a space separate from the company’s Board of Directors where all owners can receive information, discuss their perspective as shareholders, and align on a shared vision. It gives the principals a voice and creates transparency, which is the most effective way to monitor the agent (the active sibling) constructively and reduce conflict. - A Blueprint for Your Family: The Family Constitution
While a shareholder agreement dictates legal rights, a Family Constitution articulates the family’s soul and sets the “rules of the game” for the agent-principal relationship. This document can define acceptable levels of business risk, establish policies on compensation for active family members, and outline a process for resolving conflicts. The process of creating the constitution forces difficult conversations into the open, transforming a family into a cohesive ownership team that can hold the active manager accountable to an agreed-upon standard. - From Passive Shareholder to Competent Owner: Fostering Ownership Competence
The greatest antidote to uninformed activism from passive owners is education. The goal is to cultivate “ownership competence”, the knowledge to be a responsible and strategic owner. This can be achieved through dedicated educational programmes that teach family members how to read financial statements, understand the company’s competitive landscape, and appreciate industry challenges. When principals are informed, their judgment improves, their trust in the agent grows, and their contributions become more strategic. - Clarifying the Financial Relationship: Policies on Dividends and Liquidity
Finally, equity requires clear financial policies that separate returns on capital from compensation for labour. A formal dividend policy helps manage expectations and ensures all owners receive a fair return on their investment, distinct from the salary and performance bonuses earned by the active family employee. Furthermore, clear buy-sell agreements and other liquidity mechanisms are essential. They provide a defined exit path, so that passive owners feel like investors with options, not prisoners of the family legacy.
The Real Work of Legacy
Shifting the focus from a one-time act of financial equalisation to the ongoing work of building a strong governance system is undeniably harder. It takes time, patience, and a willingness to face uncomfortable conversations. Yet this is the work that allows a family to steward both its assets and its relationships across generations.
The statistics are sobering: many family enterprises fail to transition successfully, often because trust breaks down. The families who defy these odds are not the ones who simply equalise the balance sheet. They are the ones who invest in systems that create lasting equity for everyone. They build a family strong enough to own a business together.
