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Concerns Over Comp and Trust

Dear Advisor: I'm very close to turning over the business I founded to my children. Naturally, during my career, I tried to be smart about taxes. I expensed whatever I could, but I always left money in the company to build the company's strength.

With several of my kids in executive positions, I'm concerned that they will pay themselves and put expenses through the business to the extent that they will reduce rather than grow the company's capital.

How can I be sure the kids won't jeopardize the business?

 


Your question suggests a "do as I say, not as I do" attitude. You didn't make clear distinctions between business and personal expenses, but you certainly expect your kids to. You would be more comfortable now if you'd taught your kids, by your own example, to respect the boundaries between their own finances and those of the business.

Still, several steps will help you to have greater confidence in the next generation leaders of your family business. Tell your next generation leaders that, before you step aside, you expect three things:

  • a clear and specific policy clearly delineating personal and business expenses that everyone thoroughly understands;
  • a clear compensation policy including base pay, bonuses and deferred comp;
  • assurance that the policies will be enforced. Your board regularly should review compensation and expenses as part of their oversight of the profit and loss report. Routine review of the balance sheet will show the status of business capitalization.

A bigger concern, however, is what appears to be your fundamental inability to trust your children to appropriately respect your family's business. Since they will be managing the business together, we hope that they do not have trust issues with each other. Without trust, you lose the greatest advantage available to family businesses.

So develop clear policies related to compensation and business expenses, monitor financial performance through the P & L and balance sheet--but, if you cannot trust family member executives, consider selling the business.

The Advisor

 

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