Brown-Forman, the company behind Jack Daniel's, was founded in 1870. Today it's controlled by more than 100 descendants and their spouses, many of them cousins. According to a recent Wall Street Journal piece by Harvard Business School's Christina Wing, the stock has lost more than half its value over five years, the family has split publicly over strategy, and they've been arguing about whether to take a $15 billion buyout offer.
Your business probably isn't Jack Daniel's. But the pattern Wing describes shows up at a lot smaller scale: a Minnesota HVAC company, a dental lab, a family farm. Grandpa builds it. His kids run it together and mostly get along. Then it passes to the grandkids, and suddenly a handful of cousins who see each other at Thanksgiving are business partners.
Here's how to plan for that before it happens.
What happens when cousins inherit a family business?
They become business partners overnight, usually without the shared history that kept their parents working together. Some cousins work in the business and some just own shares. Some need cash and some want growth. Without a buy-sell agreement, a distribution policy, and a clear decision-making structure, those differences turn into fights over pay, dividends, hiring, and whether to sell.
Wing calls this the cousin problem. Siblings who inherit a business have spent their whole lives arguing and making up. Cousins often haven't. Many grew up in different states and only know each other from weddings and funerals.
The business doesn't care. The day the shares transfer, those cousins are partners, with all the same issues as any other set of co-owners who never sat down and agreed on the rules.
How do you keep cousins who work in the business and cousins who don't from fighting?
Separate what people earn for working from what they earn for owning. Cousins who work in the business get a market-rate salary for their job. All owners share profits based on ownership. Then consider giving extra ownership, or extra control, to the cousins who actually build the business, so the ones doing the work aren't carrying everyone else for the same share.
The classic blowup: one cousin spends 25 years running the company while three others cash distribution checks and second-guess every decision. The operator feels exploited. The passive owners feel shut out. Both have a point.
Wing suggests a fix I like. A founder with three kids leaves each one 25% and puts the last 25% in a trust. A trustee later hands out that share based on who actually shows up and builds the business.
Two other tools I use all the time:
- Voting and nonvoting units. The cousins running the company hold the votes. Everyone shares in the economics. That keeps a passive owner in Phoenix from blocking a decision the operators need to make on Tuesday.
- A family employment policy. Written rules for which family members can work in the business, what experience they need first, and how they get paid and reviewed. Same standards as everybody else.
What should a buy-sell agreement say when cousins own a business together?
A family buy-sell agreement should spell out who is allowed to own shares, what events force a buyout, how the shares get valued, and how the buyout gets paid. The usual triggers are death, disability, divorce, leaving the company, and simply wanting out. Without one, an unhappy cousin's main option is a lawsuit, and Minnesota courts can order a buyout or even break up the company.
In Minnesota, a shareholder in a closely held corporation who's treated in an "unfairly prejudicial" way can sue and ask the court to order a buyout. LLC members have similar remedies under the Minnesota LLC Act. Those cases are slow, expensive, and very public. A buy-sell agreement replaces that fight with a formula everyone signed years earlier.
The pieces that matter most for a family business:
- Transfer limits. Shares stay with descendants. No in-laws, no ex-spouses, no creditors.
- A valuation method. An appraisal process or formula, set now, not argued about later.
- Payment terms. Several years of payments, so buying out a cousin doesn't sink the company.
- Funding. Life insurance for death buyouts, plus a plan for the rest.
- A liquidity window. A set time each year or two when a cousin who needs cash can sell some shares back at the agreed price.
Should a family business pay dividends or reinvest the profits?
Decide with a written distribution policy before the cousins take over. Pay enough to cover each owner's taxes on business profits, then pay a set percentage of what's left and reinvest the rest. Revisit the policy every few years. A written rule takes the fight out of the decision, because cousins in very different financial situations will never agree on it case by case.
Wing makes a point here that's easy to miss. People who inherit from the same family don't end up in the same place financially. One cousin is doing great and wants every dollar reinvested for growth. Another is struggling to pay for their kids' college and wants a bigger check. Neither is being unreasonable.
If you own an S corporation or an LLC taxed as a partnership, this gets sharper. Each owner owes tax on their share of profits whether or not the company pays out a dime. A cousin who gets a tax bill with no distribution to cover it will not be patient for long.
How do you prepare the next generation to own a family business?
Start years before the transfer. Teach the kids and grandkids how the business works, how the money works, and how owners make decisions. Bring older grandkids into annual owner meetings. Give the cousins reasons to spend time together that have nothing to do with business. Heirs who know the company and trust each other handle disagreements. Strangers sue.
Wing works with a fifth-generation family business with 144 cousins. Starting at 15, they learn the family and company history, get personal finance training, and get help with education and career choices. In their 20s, they learn how the family council and board work.
You don't need that scale to borrow the approach. For a Minnesota family business, it can be as simple as:
- An annual owners meeting where the next generation sits in once they're adults.
- A one-page family mission: why the business exists and what the family wants from it.
- A summer job or internship track for grandkids who are interested, with a real boss who isn't their parent.
- A family trip or gathering the business pays for, just so the cousins actually know each other.
Most family businesses don't fail at the cousin generation because the business is bad. They fail because nobody wrote down how a group of near-strangers was supposed to own it together. A buy-sell agreement, a distribution policy, and a next generation that actually knows each other fix most of that.
Does My Family Business Need an Attorney?
If you need a quick review or help with your business documents, let's schedule a Legal Strategy Session online or by calling my Edina, Minnesota office at (612) 294-6982 or my New York City office at (646) 847-3560. My office will be happy to find a convenient time for us to have a phone call to review the best options and next steps for you and your business.
