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Parting Ways-Part 4: Let My People Go

Buy/sell agreements are among family businesses most important documents. Well, that may be a bit melodramatic, but I am dedicating this fourth (and final yea!) column to the subject. Many business owners won't discuss buy/sells for fear of the consequences. As a result, they miss an important opportunity that goes far beyond the document's legalistic purposes.

One group will be all ears (and vocal cords) if you raise the buy/sell subject to those who might want to split one day. Indeed, that is the crux of the matter. If you think that someone might want to sell one day, you probably won't raise the subject. Or, you'll start the discussion and get bogged down on the pricing.

Sure, you can argue for a low price that prevents them from selling. That's the stick approach. How about offering the carrot instead. Perhaps it would be better to find ways to motivate people to want to keep their shares. But offering the carrot requires you to find out what might motivate them to want to sell and, more importantly, to want to stay.

So, the key to the buy/sell story is that you must talk in-depth about it. It should not be primarily a negotiation about price. Rather, use the potential price impasse to explore a series of important questions and issues:

  • If you think a higher price is appropriate, why? Conversely, if you think a lower price is appropriate, why?
  • What are each family member's feelings behind why they favor those who might choose to stay or leave and, therefore, benefit or suffer from the pricing preference?
  • Then, discuss the possible consequences to the departing and remaining shareholders and to the company.
  • Then, don't try to change others views on buy/sell pricing. Instead, ask, What can we do to resolve the underlying issues raised as a result of these discussions?

Yes, these discussions might let the proverbial genie out of the bottle, unleashing pent up anger and frustration. Moses words to Pharaoh come to mind. Let my people go. In a family business, you can get away with holding family members as shareholder-hostages for a while. But, the result can be a building of tensions that culminates in problems far greater than the cost of letting them leave gracefully and on fair terms if they really want to go. Wouldn't it be better to discuss their concerns now, rather than waiting until they decide to hire a lawyer to facilitate their departure?

Don't Bail Too Fast

For those whose desire for a high price underlies a personal desire to sell, I have a few thoughts. 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.

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, you should consider the consequences of selling.

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 will be permanently affecting your and your descendents future rights and involvement in the business. It can create resentment and alter voting relationships within the family.

Selling your stock can have a serious impact on business operations. It's not just your piggybank. The livelihoods of your employees, customers and others can be affected if your demands are too high.

Understand that family members who will remain shareholders want a viable, ongoing business. There is a limit on how much the company can afford to pay to buy back its shares. Is it fair to expect your family members to risk the business and their future livelihoods for you to be able to cash in your stock on a whim or for an excessive price?

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. Work with your family to explore alternatives to dealing with the issues that might motivate you to sell. If you must, you must. But, trading your heritage for short-term benefits may not be the right decision.

Fair Agreement

I have found that the existence of a fairly priced buy/sell agreement actually reduces family stress. Once people know that they can sell, and get a fair price, their desire to do so often dissipates. Perhaps the reason is that they finally face the finality of the consequences of selling, and back down.

Hopefully, your buy/sell agreement will stay in the desk drawer. But, if ever someone wants or has to leave, they should be allowed to do so with grace, dignity, compassion and a sense of fairness. If you can't stay in business together, a fair agreement at least will help to ensure a continued healthy family relationship.

Approach the buy/sell discussions in this spirit, and you will dramatically improve the odds of having a shareholder agreement, not just a draft. And, you'll decrease the chances that anyone will ever trigger it!

Ross Nager is Senior Managing Director of Sentinel Trust Company in Houston, Texas

 

 

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