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Helping Family Businesses
Prosper Across Generations®

Owners By Choice

By Craig E. Aronoff and John L. Ward

Many family business owners don’t choose to become owners.  They become owners by inheritance or gift.

Regardless of how an owner becomes one, we believe that remaining an owner should be a matter of thoughtful choice.  A family business deserves owners who want to be owners, not owners who are forced to be owners.  Little could be worse for a business than having uncommitted, unhappy owners.  Yet many miserable shareholders continue as owners because the price of not being one is just too high or because they see no way out.  And in many family businesses, there isn’t one.

Ownership as a Trap

Owners want to be owners for a variety of reasons.  They say: “Being an owner helps me feel connected to the family;” “This is part of my legacy;” “I’m a steward, too, and it’s part of my responsibility to carry this business forward” or, “I like the financial returns.”  Some also think that ownership offers them unofficial rights, like a job in the business or a seat on the board.  Obviously, owners don’t want to give up what they perceive as benefits.

Nevertheless, some of what may seem to be benefits can be traps.  Feeling that ownership is the main connection between an individual and the family is unhealthy.  When asked why they don’t sell their stock, some people say, “Because that would cut me off from the family.”  So they stay owners when they would rather not.

We discourage unofficial entitlements.  Providing owners with employment or the prestige of being on the board or other perks just because they are owners is inappropriate.  They’re bad for the business, and probably not good for the family either.

Staying an owner because you like the dividends is fine for an investor, but it doesn’t qualify you as a good and effective family business owner.  Better perhaps to sell your shares to a family member who would really care about being an owner.  Plenty of other investment opportunities are out there.

Providing an Exit

We encourage business-owning families to provide shareholders with the opportunity to make a “graceful exit” from ownership.  The only way to make ownership truly voluntary is to give owners the option of getting out, and that requires the family to have some kind of redemption policy.

Many families avoid creating redemption policies under the questionable notion that they want owners to stay owners forever.  They fear the harm that can come to a business when the demands for redemption become too great for it to handle.

That’s a legitimate fear, but it’s one that can be managed through a carefully crafted policy that balances the needs of people who want to cash in their shares with the needs of the business for capital.  Such a policy is likely to state that redemption CAN occur, but that it can only occur under certain circumstances--such as when a given amount of money is available.   It might specify that redemption can occur when capitalization exceeds a certain amount, or provide that a certain percentage of profit will be set aside each year in a pool that will be available for redemption.

Creating a redemption policy is not a do-it-yourself project.  Such policies are complicated from the perspective of tax and securities law, and they get you and other owners into discussions of difficult issues, such as the value of shares, shareholder or buy-sell agreements, and the like.  You will need the help of your lawyer and your accountant in drafting a redemption policy.

Emotional Liquidity

A business-owning family needs not only to provide opportunities for financial liquidity for owners but also to provide them with emotional liquidity.  By that, we mean families ought not confuse ownership of the business with membership in the family.  An individual, who no longer chooses to be an owner, should not be made to feel that he’s a disgrace to the family, betraying others, or that Great Grandfather is turning over in his grave.  A graceful exit means a family member should be able to depart ownership with dignity and without being judged by others.  It also means assuring people that, although they are no longer a part of the business; they are still an important, valued, and welcome part of the family.

A side benefit of providing owners with opportunities for exit is that doing so contributes to their independence.  It enables them to make important decisions about their own lives.

The most important benefit to the business, however, is that it helps assure a caring, active, committed ownership group.  It provides an opportunity for weeding out indifferent or unhappy owners and retaining a committed, cohesive ownership group who will give the business the support it needs to prosper.

 

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