If you are watching Succession on HBO (if you aren’t, YOU SHOULD BE), you know how dysfunctional the Roy family is. Everyone is dependent on dad for money and affirmation. Not good. We sometimes see the real-life version in family owned businesses but without the cold calculation of Logan Roy.
A business grows and is successful. The business needs more talent to keep growing and the owner believes his/her family members can make a positive contribution to the success. Despite the stories we all hear, often the next generation does make a great contribution and aids in the success of the business. The problem can be in how are the family members paid.
With plentiful profits, the owner wants to spread the success around to family in the form of large salaries and healthy benefit packages. Productive family members may make two or three times the market salary for their position. The elder generation sees it as wealth transfer and feels good because their kids are motivated and working hard.
What’s the problem?
We have recently seen several situations where the founder realizes the business has grown as much as the family can manage and it is time to sell. The businesses have substantial value and are attractive to buyers. As much as $500,000 in excess salary can be added back to earnings based on above market family salaries. But what do the kids, perhaps in their 30s and 40s, do once the business is sold and no one else in the market will pay them the same salary?
They panic and talk the founder out of selling. They say they can keep running the business and everyone will live happily ever after. The founder agrees because he loves his kids but he knows he walked away from a lot of money.
It is our feeling that if a family wants to pay working family members directly and in cash, it is better done in the form of a bonus than in salary. Bonuses are how non-family members are often rewarded for company success, treat family members the same way.