We’ve long advocated opportunities for family shareholders to redeem shares. Such opportunities typically increase family harmony and increase ownership commitment by other shareholders. As one family business shareholder put it: “Without the choice of freedom there can be no real commitment.”

That said, families often struggle with how to price redemptions — especially if they are infrequently offered. We’ve heard some interesting alternatives.

  • Reverse Auction: Ask each shareholder to offer a price at which they are willing to sell. Redeem those who offer the lower prices until the company feels it’s out of funds for this purpose or until the price is believed too high for the company’s welfare.
  • Two-Tier: The company offers a price at which a shareholder can do a partial redemption and a higher price if the seller redeems all their shares.
  • Individual Negotiations: The company negotiates with individual shareholders individually. Different shareholders may strike different deals.

These approaches are usually quite proper from a legal perspective (always consult your advisors on securities transactions.) But we usually find them to be less than constructive for family businesses. For the sake of family harmony, we urge an open process for trading in shares of the family business.

As families, the sense of “fairness” and “treating everyone the same” is especially important. Such an attitude usually overwhelms the free market attitude of willing buyers and willing sellers working out specific deals. The inevitable rub, it seems, is that someday the current non-sellers may become sellers. They will remember the precedents of the past.

We usually prefer the approach of company management making an open offer to purchase up to a certain number of shares on behalf of the corporation at a price that doesn’t lessen the shareholder value of the remaining shareholders. Those shareholders who wish to redeem may do so, all or in part.

In summary, the key recommendations we propose are:

  • Establish a price that is attractive to shareholders but doesn’t dilute shareholder value for those that hold on to their shares.
  • Assure a fair and open process — full and equal disclosure to all family members.
  • Avoid competitions that pit one family member against another in the selling process.
  • Remember, whatever the process and price, you are setting a well-known precedent for future generations on how to treat each other as family.

There can be a couple of interesting special situations. What if family members think that the company will go public or sell out some time after they have redeemed? That’s a legitimate concern that can be addressed by an agreement that if the company does sell out or go public (in say, the next five years) the premiums above the redemption price are shared with those who redeemed within a specified time period.

A second special case is if a second, third or fourth generation company has voting and non-voting stock. What do you do? We suggest that the redemption be arranged so that the seller redeems the same proportion of their voting and non-voting shares. Otherwise, any disparity between economic interest and voting power will exacerbate conflicts and perceived unfairness

Redemption arrangements are complex and unique to each family situation. We, of course, urge you to get legal, tax, financial and family business counsel. We hope the above thoughts provide some useful ideas. We’d love to hear how your family business handles redemptions.