Creating an internal market for shares in the family business
As family businesses pass through the generations there is a tendency for the shareholding to become more dispersed as more family members own shares in the business.
Obviously, with a more disparate shareholder base there are potential issues in terms of communication but the bigger issue tends to focus on the value of the shares and the ability of an individual to sell them.
As Howard Hackney, one of the leading family business consultants in the UK explains, “it becomes more important as the business goes from one generation to the next, that there are mechanisms in place to allow the next generation who do not want to be part of the family business, or own shares in it. Having the right mechanism to ensure that the shares can be sold is essential if the shares are to be traded and have the ability to remain within the existing family bloodline first and foremost too.”
Buying and selling shares in a family business can be a fraught affair but with a degree of planning and an open communication forum, measures can be introduced to ensure that this challenge can be addressed.
In the first instance, the family needs to determine some ‘ground rules’ and sign up to these as a protocol, ideally incorporating them into the underlying shareholders agreement for the business.
Key questions that need to be asked include:
- Who can own shares in the family business?
- Who cannot own shares in the family business?
- What does the role of a shareholder entail?
- How do you become a responsible shareholder?
- When disposing of shares, are there preferential purchasers?
- How do you value the shares in the family firm?
- When can you buy and sell shares in the family business?
Each an every family has a unique dynamic which needs to be factored into the debate but the point about who can own shares in the family business needs to be given careful thought and consideration. Many families take the view that the shares need to be retained within the family descendants of the founders and exclude husbands/wives/civil partners from being able to own the shares in the business in order to protect this aim.
Another consideration is the underlying objective of the shareholders in the family firm. Once a business has transitioned past the third generation, it is often stated that the family see themselves merely as custodians of the business for the future generations. As Howard continues, “if this is the case, clear rules regarding the sale of shares are important, and one measure that needs to be discussed is the priority for the sale of the shares, possibly along the lines of the same bloodline first and foremost before opening it up to the other family shareholders, the broader family and even, resources permitting the company to buy them back.”
“This is a complex area and needs to be discussed and agreed to ensure that there are no disagreements down the line. Any policies need to be clearly documented and agreed to ensure future clarity and understanding to enable the family to continue harmoniously as a family, in business together, and as shareholders too,” continues Howard.
Agreeing on a formula that can be applied to value the shares is also a sensible thing to do as it becomes clear to all what the shares are worth. “It is also worth agreeing a timetable of when shares can be offered for sale to minimise any disruption to the family and the business, with some families agreeing, for example, that shares can only be offered for sale at the end of every third year of trading,” concludes Howard.
Clearly, the issues surrounding share ownership and share valuation in a family firm are not simple issues but they cannot be avoided as someone, at some point, is going to want to sell their shares and agreeing a protocol will help to make sure that the process is as smooth as it can be. The alternative is disruption, potential disagreements between family members and the likelihood of significant legal fees too. Remember, it is better to bequeath your wealth and not your problems so addressing these issues before they come to the fore is key.