Family Business? Keep It Professional

Dave,

My father isn’t involved with our family-owned business anymore, but he’s still a one-third owner and insists on taking a salary. This situation has begun to cause problems for other members of the family, and I was wondering what your take is.

Tracy

Tracy,

If I understand correctly, three owners form the board, and you three direct the management and leadership of the company. That means if your dad gets outvoted on something, he must accept it because he’s a minority owner. As an owner who is no longer actively involved in the company, he should be getting a distribution of the profits—not a salary. Specifically, one-third when the profits are distributed.

Let me give you a visual. Draw three concentric circles so that they all overlap in the center. It should look a bit like the Olympic symbol—a Venn diagram. In each circle, write “owner,” “management and leadership” and “family.” This is a standard family business diagram. Most problems in family businesses come when someone forgets which circle they’re in. You could be a member of the family but not have any ownership or be in leadership. You could be in leadership but not be part of the family or be an owner. You could also be a member of the family and be an owner but not work at the company. That would be your father.

I think you guys need to reset things in your business. It’s time for the working owners to sit down with your father and have an adult conversation. The discussion should be professional and gentle and go something like: “Dad, we all set this up in the beginning. But we’ve made some mistakes. We shouldn’t be paying a salary to people who don’t work in the business. You’ve been repaid for your venture money, and from now on, you’ll be getting a distribution of profits instead of a salary. We think this is fair and reasonable, but if you don’t agree, we can discuss buying you out of your third of the company.”

It sounds like things are already strained, but you’ve got to have a professional setup within the business. Do your best to be respectful and reasonable with your father. But you need to get this sorted out and agreed on before it causes any more hard feelings.

- Dave