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WHEN AN HEIR TO A FAMILY BUSINESS IS EXCLUDED

A CASE STUDY TO SERVE AS AN  EXAMPLE
Alberto, 30 years old, is the only son from the first marriage of Manuel Delgado, one of the two successors of Ricardo Delgado, the founder of the family business.

The separation of Manuel and Alberto's mother was traumatic, to the point that for years Manuel never had contact with his son.

Manuel remarried, and had two children with his second wife, with whom he lived until his death, which occurred suddenly two years ago.

By that time, the relationship between Manuel and Alberto had been restored:  Alberto had joined the family business as a salesman and, as a result of to his ability and commitment, had become head of the commercial area.  The children from Manuel’s second marriage Manuel never worked in the company.

Given Alberto’s success in the family business, eveyone was shocked when they learned that Manuel had excluded Alberto from owning shares in the family business. 

Manuel indicated in his will that it was not his intention to disinherit Alberto, but rather he intended to compensate Alberto with other available assets.  Manuel’s will explained that because Alberto was single, Manuel wanted to avoid any possibility that Alberto’s mother might own shares (e.g., if Alberto died).

 Alberto's reaction was immediate:  having felt discriminated against and unrecognized, he began working inefficiently, looking for ways to get terminated (and receive substantial compensation for being terminated).  He distanced himself from all members of the family, especially his half-brothers, and questioned the appraised value of the rest of his father’s property – seeking to receive a higher portion of the total assets. 

Ultimately, he did not consider his father’s decision legitimate, and he sought the highest possible compensation settlement.

TAKING A LEGAL APPROACH vs. A SYSTEMS APPROACH FOR THE BUSINESS AND THE FAMILY
Manuel chose to protect the company from a risk (his first wife becoming a shareholder) without considering all of the posible consequences of that goal.

The mechanism which Manuel used (his will, with a partition between his heirs) is legally indisputable, but at the same time it had dangerous consequences for the family unit and the continuity of the company.

If more thought had been given to the posible consequences, a testamentary trust might have been considered, which could prevent selected people from becoming shareholders, or he could have come to an agreement with his brother on a share purchase arrangement  which would limit ownership of shares to his direct line of descendents.

In short: taking a holistic view of the potential heirs and their relationship with the company could have resulted in a solution which limited the perceived risks while also minimizing collateral damage to the family.
FACTORS OF EXCLUSION
There are many factors which can lead to excluding someone from inheriting shares in the family business while not excluding them completely from the total inheritance. 

To organize these factors, we can classify them as arising from birth or arising from attitude and behavior.

Factors of exclusión arising from birth include: 
• Gender
• Birth order
• Skin color
• The nature of the kinship.

Factors of exclusion which arise from attitudes and behaviors include:
• Incompatibility of values
• Unacceptable behaviors which negatively affect the company (e.g., negative attitude, devaluing, passive, etc.)
• Unacceptable conduct in family life (e.g., conflict, intolerance, aggression, violence, etc.)
• Unacceptable conduct in civic life (e.g., political, commercial, sexual orientation, religious choice, etc)
• Unacceptable choice of partner
• Lack of ability, arising from birth or later (disability, alcoholism, drugs, crippling diseases, etc.)

MODES OF EXCLUSION
Someone can be exluded as a result of specific action taken by the owner (as in the case study described in this article) or they can be excluded by default -- leaving somebody out in a subtle yet consistent manner.

In turn, the reason for the exclusión may be explicitly communicated, or may be understood or implied, for each person to interpret as they wish.

ATTITUDES OF THOSE WHO ARE EXCLUDED
Those who are excluded may accept their exclusion, or, conversely, may choose to resist.  Interestingly,  there may be an evolution in this attitude   For example, a daughter who, while her father was alive, agreed (apparently) to being excluded from family business management, becomes a key member of management after inheriting shares from her father.

THE CONSEQUENCES OF EXCLUDING AN HEIR
Anyone who excludes an heir to the family business usually ends up looking biased:  either from their own limitations (originating in their anger toward some characteristic or behavior that heir), or from the limitations of their advisers in managing the relationship between the family and the business.

In many cases the exclusion of an heir ends up hurting the very people whom the owner meant to protect, as legal disputes, or the loss of collaboration, can have serious consequences for the intended beneficiaries.

Those consequences may involve suspension or discontinuance of family relationships; economic costs associated with the development of cross trials; uncertainty for decision making regarding business or property, and consequently delaying the development of new projects; and the loss of the emotional value of the family business for the family unit.

Therefore, it is recommended that owners who are unable or unwilling to maintain equal or equitable shares among all heirs carefully analyze the causes of such a decision, and to seek to execute the most suitable alternatives which can prevent or minimize negative consequences.

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