What Should We Do With A Windfall
Our business just had a wonderfully surprising and pleasant "windfall" from the sale of a piece of unused land. We have ten family shareholders, six not employed by the business and four in management. Should we declare a "special dividend" to all the shareholders?
We don't know all the facts, of course. For example, we don't know if the company is desperate for cash---though the tone of your letter suggests it is not. And, we don't know if all the shareholders have large personal investment portfolios and are eager to avoid paying taxes---we suspect not.
If the facts are as we surmise, we usually encourage paying a special dividend to shareholders when there's such a windfall from a real estate sale or a favorable lawsuit settlement, or a large unexpected tax refund, or the sale of an incidental division. These special situations provide opportunities for family members to secure their "nest eggs." Someday, such personal security will be essential to business risk-taking or passing the shares on to the next generation. We find a family business is more aggressive and more long term when its shareholders are financially secure.
We also find that not to declare the special dividend implies a lack of trust or confidence in family membersâ€™ ability to cope with the money. When that is suspected--- and it usually is---there eventually will be a harsh backlash and the urging to sell the business or increase annual dividends. To avoid that likelihood, we support the idea of the "special dividend" you're considering.
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