Family businesses are unique in that their employees (i.e., family members) usually know a lot more about each other’s personal business than in most other organizations. Many family businesses have shareholders who work directly inside the business (insiders) as well as shareholders who do not work in the business at all (outsiders). When a family business has both “inside” and “outside” ownership, it can lead to conflict over what is considered the best use of the profits. Insiders tend to want to reinvest the dollars into the business for growth and new opportunities, while outsiders tend to want a continued yield on their ownership. These are both valid points of view.
Since a distribution is a discretionary allocation of capital and there is no legal requirement to pay one, how do you avoid the conflict that can arise from these varying viewpoints?
1. Communicate.
As with many things in business (and life), communication is key. Holding periodic family meetings that include insiders and outsiders is a crucial start down the path of harmony. These meetings should be used as a platform to educate the outsiders about the company’s performance, trends in the industry, and upcoming goals or ventures the company is planning to embark upon over the next few years.
2. Incorporate a valuation formula.
Another trick is to incorporate a valuation formula, preferably into the company’s buy-sell agreement, to provide an indicator of value. This way, a family member can determine what their shares are worth at a given point in time, which enables them to make a more informed decision about whether to retain or sell their shares.
3. Develop a distribution policy.
Finally, a distribution policy can be another great tool in setting guidelines for which profits will be reinvested in the business versus which will go out to shareholders. This will help set the proper level of expectations as to how much and when distributions from the business will occur.
These three steps can help your family business avoid costly confrontations and accusations – neither of which is healthy for the family or for the business.
Steven E. Staugaitis is a director at Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at Email.
