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My Personal Piggybank

When I was growing up, I had a piggybank. Well, actually it was a metal replica of a bank building. But, I called it my “piggybank.” I put coins in whenever I could. I rarely took money out, although I could. After all, it was my piggybank. It was my money.

When I got older, I had a real savings account at a bank. My money went in and I could take my money out and buy whatever my heart desired. Although it preferred deposits, the bank expected withdrawals. It didn’t really care when I took money out. Other peoples’ money just replaced mine, in their own accounts of course.

Some family business owners look at their businesses in the same way. It can start with the founder, who takes money from the till for business (or personal) needs without the proper recordkeeping. The business and the money belong to the founder, so who cares (other than, perhaps, Uncle Sam)?

As the company grows, the owner begins to play more sophisticated tax games, like taking salary and perks that arguably are greater than what a non-owner might receive. Kids’ allowances masquerade as tax-deductible salaries for services never rendered.

The kids see all this and learn. After school, one or two come on board, much to their parents’ glee. An above-market salary serves as an enticement, although it becomes an entitlement as lifestyles rise to meet it.

Fast forward. Some kids are in, some are out. All own stock. “I need a new house!” says one. “I need more income to help put my kids through private school!” says another. “But, the business needs the money to grow,” says a third. “I think that your proposed new strategy and related capital investments stink!” says the first. “It’s our business, too, and we deserve to share in the rewards of ownership,” says the second.

Sometimes the disputes are honest disagreements over vision and risk tolerance. It could be an inadequate analysis of a business proposition or a lack of communication about it. Other times, it’s a lack of understanding of how a business needs capital to operate.

Joint ownership of the piggybank is tough, they all agree. Some want to keep the money in and others want to take it out. But, it’s not that simple. A bank may be ambivalent about money going in and out. But, a business cannot function that way. Shareholders can’t simply cash in their chips whenever they want some spending money. They are owners, not depositors or lenders.

My premise has always been that unwilling shareholders should not be held hostage. If they really want out, let them sell if at all possible. But, everyone should consider the consequences of selling. Where should the line be drawn? Should “dribbling” redemptions, meaning a little here for a car and a little there for a vacation, be permitted? Probably not, especially when you consider all of the implications. That’s the piggybank mentality at work.

Think twice before you decide to buy that new house by redeeming some shares. Unlike cashing in some Intel stock, you probably can’t replace the family business shares you sell. You may be permanently affecting your and your descendents’ future rights and involvement in your heritage. It can have a serious impact on business operations. It can create resentment and alter voting relationships within the family. And, high-priced redemptions can set a bad valuation precedent for future gift and estate tax purposes.

Even if you are the sole owner, it’s not just your piggybank. The livelihoods of your employees, customers and others can be affected if the demands are too high. Raiding the piggybank was no big deal when you were a kid. The stakes are much higher when you consider a raid on the family business. Approach the issue with care, good advice and a very long-term perspective. Make sure that you truly understand the real reasons you want to sell shares. If you must, you must. But, trading your heritage for short-term lifestyle benefits may not be the right decision.

 

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