Cause #41 Buying & Selling Interests in The Business

Observations

Another common cause of conflict in Family Business gains oxygen when family members are, or feel they are locked into ownership of the family’s business interests – notwithstanding their wish to not be involved.  This uncertain feeling develops into conflict when it begets an uncomfortable sense of: “obligation to do stuff” – either in relation to the business itself, or with a relative(s) they don’t much like.

We’re talking about situations where, for whatever reason, a family member would prefer to sell some or all of their interests in the business (and/or exit the business if they’re working in it), but can’t find any acceptable / agreed / practical / legal means for so doing.  Their growing sense of fruitless and frustrating entrapment creates a fertile ground for conflict – even if, to an outside observer, they have little objective cause for concern.

After all, this is about perception, because in family business especially, perceptions should be treated as though they are each individual’s reality.

Conflicts also arise when a family has a declared mechanism in place for the sale or purchase of shares in the Family Business and yet, for whatever reason, family members can’t, won’t, or aren’t able to use said mechanism to do a deal amongst themselves that feels fair and reasonable, under all the circumstances.

Although the presenting issue is the obvious failure to transfer shares, that’s often a symptom of deeper root causes.  If that’s the case the blockage is actually a catalyst, rather than a root cause, of conflict.

Conflicts also arise when some family members regard themselves as Owners of the business, and believe they have an unfettered right to do whatever they like with their perceived ownership stake, while others see themselves as Stewards of the family’s business, and of its legacy.  They want to hold and nurture some or all forms of shared family wealth for the benefit of current AND future generations.

It is oft said that the sweetest words a litigation lawyer can hear are: “It’s a matter of principle”, because that says the speaker is ready to fight to the very last drop of their … funds.  Owners vs Stewards debates dive deep into family values and principles territory.  When lawyers are called in to help assert party rights by enforcing what are often seriously out of date trust and legal agreements they usually succeed in splitting the family into 2 or more cliques: Pirates, or Protectors, of the family’s business, wealth, relationships, and legacy.

Now the family’s train is firmly off the rails with the likely consequence of growing disharmony amongst family members, within and across generations, along with a slurry of toxic blowback into the business.

Solution

Because fundamentally, “Family Business makes no sense”, as soon as a family’s business interests become significantly complex and/or valuable, the family should stop relying on love, trust and goodwill (or luck) to keep things running smoothly, over the long-term.  Instead, it should use its Family Council, and/or Family Meeting(s), to formalise various Structures (documented agreements), both in the business and in the family, to outline broad principles, and to specify agreed rules and processes that need to be followed in the event certain things happen.

Benjamin Franklin is credited with saying: “an ounce of prevention is better than  a pound of cure”, meaning: it’s always better to plan ahead to prevent problems from arising than trying to design solutions on the run, after trouble has begun.  This is especially true in families, where small problems can become big problems, very quickly.

Transferring ownership is just one of the many things that should be discussed and agreed between family members to help create the Family Rule Book ( usually called Constitution, or Charter).  Other items to be included: employment of family members in the family business; performance expectations, remuneration and career advancement for family members; long-term objectives; protection of the family’s legacy; decision-making processes, etc.

When it comes to ownership transfers, the Family and the Business have important, inter-connected, complementary considerations:

If a family member then wishes to sell to, or acquire shares from another family member, the principles contained in the Family Constitution, and the legal formalities contained in the Shareholder Agreement between all shareholders, should make the process predictable, understandable, and fair.

Ideally, business families develop, agree, and regularly review their long-term plans together, both as a family, and as individuals.  Family Plans should include individual financial plans that provide families with clear indications of the financial health, and the future financial needs and intentions, of key family members.

To be forewarned is to be forearmed.

If the family is already embroiled in conflict over the transfer of ownership rights, a series of facilitated conversations, designed to elicit individual needs and interests, may help the negotiation of an acceptable deal, and the development of standard terms applicable to all future deals.

The form of the deal should closely align with the family’s agreed, long-term goals.

Summary:

• Discuss and define the family’s values and long-term goals. In particular, clarify whether the family has an ownership or a stewardship culture.
• Develop long-term Family Plans, along with individual financial plans.
• Consider the likelihood of individual needs to “cash out” at some future time – to fund travel, acquire assets (beach house), fund retirement, etc. The family can then plan together for a one-off, generational “liquidity event” that allows an entire generation to take money out of the business for personal use, while leaving enough behind to keep the business going, while satisfying stewardship responsibilities towards following generations.
• Agree mechanisms that allow transfer of ownership on what feels like a fair and appropriate basis.