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Golden Handcuffs, Part 3: Can an Active Heir Buy Out a Passive Heir?

  • 22 July 2014
  • Author: Cari Holbrook
  • Number of views: 3161
Golden Handcuffs, Part 3:  Can an Active Heir Buy Out a Passive Heir?

Welcome to Part 3 of our blog series on “Golden Handcuffs: Passing Down the Business to Heirs.” Over the past few months, we’ve discussed ways to pass down your family business to your heirs. Some heirs may be active in the business, others may be passive; this scenario holds many challenges. In this post, we look at ways you can answer the question:

Can an Active Heir Buy Out a Passive Heir?

This question may weigh heavily on the mind of a business owner when considering passing a business down to several heirs at once. If one heir decides to take a much more active role in the business, will he or she be able to acquire full ownership? When would that be an ideal option? In short, the answer is: Yes. It is absolutely an option. And the best time for an active heir to consider buying out a passive heir is when the business is ready to grow or change. This can be a significant change, like a doubling of staff or an entirely new product line. It could also be a subtle change, like a spin-off business that—on face value—seems unrelated to the original business. It’s in that latter area in which active heirs are often surprised by complications. A spin-off business—no matter how unrelated it may be to the main business—could still be fiducially tied to all owners of the original business, even if uses a different entity name, produces a much different product or service, or caters to an entirely new demographic.

So, however the active heir decides to grow or change the family business, he or she should consider approaching the passive heir with a buyout option. Here are some considerations to help decide whether this option may be ideal:

1.  Will a buyout promote (or at least not disrupt)family harmony?

2.  Can I make better choices for the business's success without the passive heir's "vote"?

3.  Can I show the risks involved for the passive heir if he or she chooses to stay an owner?

4.  Am I willing to fund a new venture entirely on my own, creating a clean break between the money, time and talent the passive heir put into the original business and the new venture?

If an active heir can answer “yes” to each of these questions, then a buyout option may be beneficial for both parties. However, the active heir should be prepared to be generous upfront to make the transaction mutually worthwhile. If this is the case, the active heir should consult his or her financial advisor and business attorney to create a plan of action.

Image Copyright: volkoff / 123RF Stock Photo


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