When the family business has shareholders with diverse financial needs and interests, disagreements over distribution policies can be challenging to the business and the family. To better manage these discussions, it may be helpful to know or consider the following:
- Estimate the financial needs of the business utilizing both strategic and operational business planning.
- Determine the shareholders’ risk tolerance –are they willing to utilize leverage to finance future needs o the company? The current environment for obtaining outside capital should be taken into account.
- Determine shareholder attitudes regarding desired ownership percentages into the future. Are they willing to take on outside investors?
- In situations where shareholders are taxed personally for business profits, allow for tax related distributions at the highest tax level applicable.
- Set a base annual living expense distribution that the business should be able to accommodate without endangering its ability to compete.
- Based on best estimates from the business planning process, estimate the capital needs of the business over the next 3 to 5 years.
- Establish a distribution formula based on the needs of the business and risk environment of the business. Some businesses have relative low risk levels as a result of stable markets, strong customer base or niche products or services not easily challenged or duplicated. Potentially higher business volatility will generally demand a higher level of reinvested earnings and a lower level of shareholder distributions in excess of tax and baseline distributions.
Remember these issues are not static, it is important to review shareholder concerns on liquidity and risk on at least an annual basis. Discuss with the board potential implications of the answer to these questions on the existing distribution policy and capital needs of the business. This also underscores why it is critical that management of the company establish and review strategic initiatives with the board on a regular basis, and that the board consider the impact of those initiatives on shareholder objectives. Finally, shareholders need to revisit their objectives and distribution expectations in light of the strategic opportunities identified for the business.