Partner,Skarlatos & Zonarich LLP
President, Venture Exit Partners LLC

Merriam Webster's Dictionary of Law defines "entitlement" as a right to benefits that is granted especially by law or contract. Although there is no law or contract that grants benefits to the family of a business owner, there is no denying the sense of entitlement among the parents and their children.

More and more family business owners are expressing concerns about the growing sense of entitlement in their next generation. Their concerns are understandable. One family business owner recently expressed his misgivings this way: "I'm concerned for the future of our company because I don't see anyone who is willing to sacrifice the time and energy that my generation did."

In the context of a family business, entitlement influences a business owner's decisions in all three business constituencies-ownership, management and control. Compensation decisions are a significant component of these three constituencies. Although compensation decisions are the subject of this article, any ownership, management or control decision that is disproportionately influenced by entitlement will likely create hostility among family members.

Like non family employees, there are several factors that must be considered in deciding the compensation of a family member:

1. What you do - salary, wages, fringe benefits, etc.
2. How well you do it - bonuses, etc.
3. What you own - Dividends, rent, etc.
4. What you previously did - Retirement and other deferred compensation.
5. Who you are - gifts, benefits, other entitlement.

Each of these five compensation elements must be evaluated separately to determine a family member's compensation. Too often, family business owners do not differentiate between these five elements resulting in compensation decisions which are disproportionately influenced by entitlement.

To combat the sense of entitlement and minimize conflict, it is critical for family businesses to develop and follow clear guidelines for compensating family members. If you would like to discuss the steps involved in setting up clear compensation guidelines for your family, do not hesitate to contact me. My firm has been advising family businesses for many years on family compensation as well as all other decisions involving the ownership, management and control of the business.

The article will be published in the July/August 2007 issue of “The Voice”, a bi-monthly publication of the Roto-Rooter Franchisee Association.

LMI collaborates with Venture Exit Partners for business exit planning