Many family businesses evolve. What starts as a sole proprietorship becomes a partnership when the children become involved. When Mom & Dad are asked about planning for the future, maybe preparing a Revocable Living Trust (“RLT”) along with a partnership agreement a typical response may be “This here is the way my Daddy did it, and I ain’t going to no lawyer to waste my money on no partnership agreement or will.”
As is often the case, so long as Mom and Dad are in control and alive, the business prospers; but what happens when both Mom & Dad die? Typically, the only written evidence of the existence of the partnership is the Federal and State tax returns and, maybe, some partnership book entries.
That is what happened in one actual case when both parents died. Let’s call the partnership, Ferd & Associates. Brothers Bob and Ray survived Dad and continued in business as 50%-50% partners, with no written partnership agreement. At one point, Ray simply declared, “It’s over.”
Since there was nothing in writing about the life of the partnership or terminating it, the partnership was terminable at will, a legal term meaning that the partnership could be terminated at any time one of the two brothers chose. Clearly, the potential for major disruption was present whenever Bob and Ray could not agree on any matter.
What could possibly cause two brothers to disagree? Just about anything! The list can be endless — from lifestyle, cash needs, the marriage of one or both brothers. The reality is often like a soap opera. Many family businesses encounter cash flow problems when two or more of the children marry and have families of their own. Some businesses can only support one nuclear family, not the second or third generations of that family.
Since oral partnerships can be terminated at any time, partnerships such as Ferd & Associates are the antithesis of planning. If Ray says, “It’s over,” Bob may say “Wait a minute, can’t we agree on some of these matters and have an orderly dissolution of the partnership?” Sometimes siblings may agree on how to terminate a family partnership, but far too often when siblings disagree and the fighting is intensely bitter. This is what happened to Ray and Bob.
As fair as it may seem to give equal control to all siblings, such approach is not always the best answer. Why? Equality of control among a group of siblings can lead to deadlock, particularly if there are an even number of siblings. Giving a child, family friend, or outsider a tie-breaking mechanism is many times a better solution than deadlock or gridlock.
Instead of assuming that everyone will always agree, it is far better to expect that family member-owners of a business will disagree when the unifying older generation-founder passes on. While not all siblings fight with each other after the last parent dies, the incidences of such friction are alarmingly high.
Don’t leave your family and business in the shadowy valley of an oral agreement like Ferd & Associates. Basic business documents, like Partnership Agreements, Revocable Living Trusts , Buy-Sell or Stock redemption agreements, should be reduced to writing. If you are not familiar with these documents or concepts, call Newland & Associates.