Coping with the In-Law Challenge

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February 20, 2020

You may have started your family business as a small venture and didn’t give much thought to nepotism. Then, you brought the kids on board and your brothers and sisters signed on. Perhaps the business continued to flourish with little conflict.

A Dozen Questions to Ask

When considering whether to bring an in-law into the business, ask the following 12 questions to help get an honest appraisal of the situation:

1. How well does the individual get along with members of the family?

2. Would the in-law have a similar job and salary if he or she weren’t married to a family member?

3. Will other family members resent the individual’s presence in the business?

4. How will the in-law’s choice affect the couple’s marriage? Would the spouse be happier if the person stayed out of the family business?

5. Will working in the business force divided loyalties between the family and the in-law? If the couple has children, how will they be affected?

6. Can you acknowledge and appreciate that the individual may be investing his or her most productive career years in the business?

7. Will other family members and employees think the individual married into the family just for a position at the company? And if they do, can the in-law deal with that?

8. How will you resolve disputes?

9. Who will the person report to?

10. How will you measure performance?

11. Should the in-law earn or inherit shares of the company?

12. Will you, the spouse or other family members resent the in-law if a decision is made to leave the family business in the future?

But sooner or later, some of those children and relatives are going to get married. And that presents the new challenge of in-laws.

Before hiring the spouses of family members into an established business, be aware that they can bring more emotional baggage than siblings and children. Even if they have great ideas for the company, there’s a chance they can disrupt both the business and the family.

Ask yourself: What are the benefits and risks? The benefits are likely to be obvious: the individual has skills the business needs and can be trusted to do the job well.

But the potential risks should be examined too. For example, the person could wind up working for a spouse. The couple could bring their personal problems into the office. What if they divorce? An in-law could even turn out to be a better leader than the bloodline successor you have chosen.

Given the potential for problems, it’s generally considered a smart move not to jump too quickly into the in-law labor pool. When it comes to hiring individuals who marry into the family, here are some approaches taken:

1. A complete prohibition. This certainly eliminates potential complications, but it also rules out hiring talented in-laws who can bring fresh ideas to the business. Handled properly, in-laws can offer new perspectives that can break deadlocks that may have existed for years.

2. No restrictions. This opens up the possibility of getting stuck with an in-law who serves no productive function. You may find yourself under pressure to create a job the business doesn’t need just to hire your brother’s wife — because your sister’s husband is already on the payroll.

3. Hiring strictly by merit. Some families allow one spouse to join the business, but based on merit, not family ties. You can, of course, make exceptions for couples that meet at work and marry after both have worked in the business for several years and have established solid track records.

No matter which approach you take, there are potential pitfalls. For example, let’s say your sister-in-law has great computer skills that are in demand and she joins the family business. Your company benefits because it needs someone with her skills. But your sister-in-law left a good job or turned down a better offer to take the position.

Later, she becomes resentful because she assumed she would play an active role in senior management — but those positions are filled. Eventually, your sister-in-law leaves the company abruptly for more responsibility elsewhere, creating disruption in the business and discord in the family.

Stock Ownership

Many family businesses allow only bloodline relatives to hold shares because that makes it easier to maintain ownership control and avoid problems in the event of a divorce, death or unforeseen circumstances.

Exceptions usually occur as the result of some extraordinary contribution to the company’s growth and success. It is important that everyone concerned understands that ownership and management are separate issues. When an in-law does perform admirably, one solution is to provide additional compensation rather than stock ownership.

When family members draw up their wills, they often ensure that their shares pass either to surviving children or to the company.

It’s a good idea for shareholders to have a prenuptial agreement and a buy-sell agreement, which exclude shares becoming part of a divorce settlement. Of course, before signing a prenuptial agreement, each spouse should be entitled to an attorney and fair disclosure.

A buy-sell agreement gives the company or the other shareholders the option to buy back family-business stock that would otherwise be transferred as part of a divorce decree.


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