Category Archives: Policies

Distribution Policies

Norb Schwarz

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.


Where do YOU draw the line?

Chris Eckrich
Chris Eckrich

Position #1:  Our family built this business and we take on all the downside investment risk.  As owners, we take many ownership perks (club memberships, cars, personal services performed by the business) so our owners appreciate some upside at very little cost to the business, providing that it is legal.  That is what being an owner is about.

Position #2:  We believe that owners deserve investment growth and dividends (when performance supports them), and we do not give owners any other special perks.  That way our owners are focused on the performance of the company.  Once you start having ownership perks, it just causes strains between management and owners and distracts us from our common purpose.

Where is the proper place to draw the line when it comes to taking ownership perks?



Bernie Kliska

Going into business with a parent, child, sibling, in-law, or cousin both demands and assumes a certain level of trust. But, you need more than good faith and a firm handshake. Future disagreements and unexpected events can occur and tear apart businesses, and relationships as well.  A shareholder’s agreement is almost a must in any business when more than one person is an owner.  Just because your fellow shareholders are family is not a reason to assume this ‘good practice’ does not apply to you.

How do you avoid splitting up a company and deciding who gets what in the heat of battle?  You may not be able to think in a level-headed manner when screaming is at the highest decibel and doors are being slammed. What is better is to plan for the worst cases, hoping they never happen.  The wording and terms of shareholder agreements can vary greatly, but they most commonly address the following issues:

1) Who may or may not own shares and what happens if shares intentionally or unintentionally fall into the “wrong” hands due to divorce, death, credit problems, lifetime transfer or otherwise.

2) Events permitting or requiring a sale, such as leaving the company to pursue another profession, retiring, being disabled, funding estate taxes or getting divorced from a family member.

3) The price for which shares can be bought or sold and how that price is determined (fair market value given minority shareholder discounts, etc.) and how that price could be modified over time.

4) The payment terms, including down payment, length of note and interest rate.

Many shareholder agreements give the company or existing shareholders the right of first refusal to purchase the shares. A shareholder agreement legally determines how to handle a host of what-ifs.

While it may be uncomfortable to go through drafting legal documents between family members – remember the adage, better safe than sorry!


Adjusting ‘On The Fly’ For Unexpected Situations

Jennifer Pendergast
Jennifer Pendergast

Earlier this week, I shared some thoughts on creating a flexible system to deal with the unexpected situations that naturally occur in family business transitions.  While planning is very important to ensure successful transitions, the best plans will inevitably need to be adjusted ‘on the fly’ when circumstances change.  So, how can families create decision-making systems that can deal with the unexpected?  There are two elements to a flexible system – one is structural and the other emotional. 

From a structural standpoint, the most flexible system is one that creates a place for making decisions and rules or policies that govern decision-making.  The place for making decisions may be a regular family meeting, a family council meeting or a board meeting.  The key to defining the place is to assign responsibilities for decisions to the appropriate parties and ensure that everyone understands who has responsibility for what type of decision. 

The rules or policies that govern decision-making include the process for reaching agreement, which may be majority rule, by consensus or some other mechanism.  The key is that the process is understood and followed.  Other rules include defining who has a vote, what we will do if we can’t reach agreement, how long a decision will be binding, how often we will revisit it, and the process for overturning a decision. Many families capture these rules in a decision-making policy. 

With the place and rules for decision making defined, a family system still has one ingredient necessary to address unexpected situations.  That ‘magic ingredient’ is trust.  No matter how strong the structure and rules are, if family members do not trust each other, they are not likely to abide by the rules or the decisions made using those rules.  Trust is not arrived at by following a simple formula.  It requires working together, building an appreciation for individual differences, respecting the opinions of others and a willingness to compromise and to forgive.  Both ingredients in a flexible system require family commitment.  So, while we can’t predict what circumstances we may face in family transitions, we can predict which families will weather them best – those who have put the hard work into developing the systems and trust required to work effectively together.


Falling in love at work

Drew Mendoza
Drew Mendoza

What rules, if any, should address what happens if you and / or other members of your family who own stock in the family business fall in love with an employee?

We’ve seen cases where that employee becomes an in-law and ascends to the highest offices of the company and then:

  • The couple divorces and the now divorced key non-family executive leaves a gaping hole in the management team after leaving the business;
  • The couple divorces and the now divorced key non-family executive remains in place and life goes on;
  • The couple never divorces and is a strong and positive influence on the business and the family.

Can having a written policy really trump the tidal pull of love?  How can you legislate feelings?  What are the risks inherent to this situation? 

While there may not be a simple answer to these questions – we find the very best multi-generational business families are proactive.  They do what they can to anticipate likely eventualities – while realizing they do not have a crystal ball. 

Ideally families would have a policy around ‘relationships in the business’ in place before the next generation is 16.  The best policies we find are those crafted and adopted by the family council – with broad involvement of family members, and a thoughtful preamble that explains the policy’s rationale.  In cases where the family is too small for such a governance body, it falls to mom and dad to put the policy in place; again, before the next generation hits their mid-teens.

Whether or not the family permits or prohibits any kind of office romance depends on the family – and possibly the business culture.  However, failure to think about these issues can lead a family to feel ‘blindsided’ when confronted with an actual relationship, which would then exacerbate the risk to the business and the family.

 What is your family’s policy on love in the workplace?


Are Family Perks Ever In Order?

Chris Eckrich
Chris Eckrich

When the economy tanked in 2008, many business owning families trimmed employee pay and benefits, and reduced perks available to family members working in the business.  While many have recovered with improved economic conditions, we see families struggle to balance their desire to professionalize their businesses (a force that moves them away from family perks) while still being an enticing enterprise for family employees (a force that moves them towards some family perks).  Non family employees have moved from merely raising eyebrows at family perks to outright resentment (especially those who experienced cuts to their own wages and benefits).  While it is easiest to choose a rigid position (either adopt a no family perks rule or simply say “who cares what non family managers think!”), many find these two ends of the spectrum unpalatable.

What are your views?


The value of experience

Norb Schwarz

I recently came across the following statement in a family participation policy regarding the requirement of outside employment for family members wanting to join the business. Please let me know of any other items you might include from your experience.

Outside work experience is required for the following reasons:

A. It’s good for the company:

  • We have a wider and more varied experience base (ideas and contacts).
  • It promotes a culture of meritocracy over entitlement.

B.  It’s good for the family member:

  • Opportunity to make mistakes elsewhere (that aren’t remembered forever).
  • Opportunity to prove oneself and gain self-confidence where a person’s last name doesn’t count.
  • Helps avoid self-doubt later down the road (could I have made it on the outside?).
  • Opportunity to find a mentor from outside the family or business.
  • Opportunity to gain different perspectives and experience and be able to start contributing earlier in one’s career.
  • Acceptance by non-family members will be easier (credibility issue).
  • Opportunity to develop honest expectations for oneself.

Family Business Owners – Beware the Tyranny of Public Markets

Otis Baskin
Otis Baskin

Many successful family businesses have made the decision to become publicly traded while still maintaining a controlling interest within the founding family.  Since family controlled companies represent approximately one-third of both the Fortune 500 and the S&P 500, it is logical to conclude that funding from the public markets is a useful strategy for some family firms.  In fact, some of the most famous family business names, such as Ford and Nordstrom, have taken this path. 

Initial public offerings (IPOs) have been used successfully to fund growth and provide liquidity in conjunction with ownership structures that provide for control to be maintained in the family.  While the current recession significantly reduced the appetite for IPOs in most markets, as the economy improves so does the expectation that IPOs will once again become popular.  However, before a family business decides to trade any portion of its shares in the public markets there are several important issues to consider.

Of course, the help and advice of excellent attorneys, accountants and investment bankers is critical to any successful offering.  Yet even before engaging experts to take their company through an IPO process, business owning families need to have open and honest discussions regarding how even the smallest portion of stock in public markets can drastically change the way they do business.  Here are some issues to consider:

  • When your business becomes a publicly traded company it will be subject to a wide range of regulations, reporting requirements, and scrutiny that you and your management team may not be familiar with or comfortable in performing.  Even with structures in place to preserve family ownership voting, the responsibility to meet SEC and other regulatory requirements can be onerous for many.  In a very real sense it ceases to be your company, your capital and your decisions, even when it represents the combined wealth of your family.  While perhaps a dramatic example, it has been argued that some of the business practices that led to fraud convictions for members of the Rigas family (Adelphia Communications) would not have been illegal if the stock had not been publicly traded.
  • Those who buy your stock may have very different interests from you and your family.  Today’s public markets are largely driven by traders not investors and they do not share the “patient capital” perspective that has traditionally represented the strength of family business.  Their desire for timely returns on investment can represent a major conflict with the long-term planning and next generation focus of family owners.  Under existing legislation, an owner of as little as 3 to 5 percent of a public company has significant rights that impact corporate governance.  Both Barnes & Noble and the New York Times have faced challenges from these types of conflicts of interest, at considerable costs in both money and the time of leadership.
  • In addition, the rules keep changing for public companies.  In our post Enron/Lehman Bros. world the costs of being a public company have increased significantly.  Smaller firms that once found IPOs a great source of capital now must carefully consider the “carrying costs” of public filings and the professional services needed to meet these requirements.

 The very nature of public markets drives decisions that have short-term pay-offs.  While good corporate governance theory maintains the importance of long-range results, efforts to incentivize, regulate and monitor such decisions have met with mixed results at best.  Once a family business becomes publicly traded it may find that the very values that made it successful are under attack.