I met Evan at a music venue one evening when my band was performing. He was a friend of a friend, and during a break we got to talking about business and life. Evan was 74 and had built a very successful consumer products company with more than $40 million in annual sales.
He mentioned that he had just come from a meeting with his estate attorney and was working on changes to his will. I had recently gone through the same process and told him about an interesting conversation I'd had with my lawyer about dividing an estate among children.
Do you divide everything equally? Or do differences in your children's circumstances justify leaving more to one than another? My lawyer had raised another consideration that stayed with me: whatever the parent's intention, an unequal allocation can send an unintended message. The child receiving less might conclude that a parent valued a sibling more. The child receiving more might wonder whether the parent thought he or she was less capable or less successful.
An estate plan doesn't just divide assets. It can also leave a message from a parent who is no longer there to explain what was intended. That was when Evan told me about his two sons.
Evan's wife had passed away a few years earlier, and his sons were his only heirs. Neal, 48, was the older son. Phillip was 46. Evan wanted Neal to take over the family business. As for Phillip, Evan said he wanted to keep him "as far away as possible because he would run it into the ground."
I acknowledged the challenges of being a parent and suggested that we continue the conversation privately. We had a Zoom call a few days later, and Evan retained me to help him figure out what he wanted to do. I started by asking how he had come to such different conclusions about his sons.
The short version was that Neal was "the smart one" and Phillip was "lazy." Neal had gone to an Ivy League school. Phillip hadn't and had bounced around among different jobs. As we talked, a more nuanced picture emerged. They were very different people, each with his own skills and challenges. I also learned something that mattered: Phillip didn't particularly want to go into the family business anyway.
The more we talked, the more I thought we were asking the wrong question. It wasn't simply which son should get the business. I began separating the decision into its component parts. Who should run the company? Who should own it? How should its economic value be divided? And did Evan want Neal and Phillip financially tied to each other after he was gone?
That helped Evan get clearer about what he actually wanted: Neal running the company, Phillip receiving a fair share of its value, and neither son being left with an arrangement that could create resentment or conflict between them.
At one point, I asked Evan a simple question: Why not sell the company and divide the cash?
He looked at me as if I were crazy. "I spent my life building this business!"
During my years in investment banking and investing, I had seen how emotionally connected founders can be to the businesses they build. For Evan, the company wasn't simply an asset to be valued and divided. My question made clear just how important it was to him that the business continue.
So we considered different approaches.
One possibility was for Neal to run the company while both brothers continued to own it, with Phillip essentially becoming a passive owner. On paper, that could work. But it could also solve today's succession problem while creating tomorrow's family conflict. Neal would run a company partly owned by Phillip, and decisions about compensation, distributions, reinvestment or an eventual sale could become issues between them. There was no reason to assume that would happen, but no reason to build the risk into the estate plan if we didn't have to.
I suggested another possibility. What if Evan left the business to both sons, but the estate plan also required Neal to buy Phillip's interest?
That would allow both sons to share in the economic value of what their father had built without requiring them to become long-term business partners. Neal would ultimately own and run the company. Phillip would receive the value of his interest and move on with his own life. Evan liked the idea.
Now we had to make it work financially. Evan asked me to value the company and structure the buyout.
I valued the business using its financial performance and relevant comparable companies. We then structured the buyout so that roughly 25% of the amount due to Phillip would be funded up front through a life insurance policy Evan already had in place, with the balance paid over time as a percentage of the company's free cash flow.
That gave Phillip meaningful liquidity without requiring Neal to come up with the entire purchase price at once or putting an unreasonable financial burden on the company.
Once Evan was comfortable with the approach, he asked me to work with his estate attorney to put the structure in place. The process wasn't contentious, and both sons were pleased with the outcome. Neal would continue the company, Phillip would receive his share of its value, and they wouldn't be left financially tied together.
The original question had been: Who in the next generation gets the family business?
But that wasn't really the question.
Estate planning necessarily involves lawyers, documents, valuations and tax considerations. But before getting to any of that, Evan needed to get clear about what he actually wanted to accomplish.
Once we separated succession, ownership and economics, a different set of options became available. We found a way to preserve the business, treat both sons fairly and avoid leaving behind a structure that could become the source of the next family conflict.
Privacy Note: Names, identifying details, places, and certain circumstances have been changed to protect confidentiality. This case is based on an actual engagement and is presented to illustrate the nature of Resolve Advisory's work.