Smart Stock Strategies for Family Businesses

Get With the Program

Shareholder wars don't necessarily result from one side of the family fence being more right than the other. It's often more a matter of stock owners simply having different agendas.

Those shareholders not directly involved in the business, the outsiders, often received their stock as an inheritance. And yet it doesn't turn out to be a great windfall: They can't sell it easily, and the money they earn from it usually pales beside the high fliers in today's markets. Outsiders often look for ways to shed this so-so investment and reinvest the money in a venture that's more lucrative and more liquid.

The insiders-those family members active in the business-have another vision. Perhaps they want to keep dividends low, so more money can be plowed into the business for growth and compensation. Or maybe they want a way out of being forced to confer with outside relatives when making decisions concerning the company's future.

Whatever the reason, it's imperative that family businesses put their own buy-back programs in place so shares to companies' stock can be redeemed by those who decide they want out. The always idiosyncratic makeup unique to each family business will determine the specifics of the plan, but "any plan considered should restrict people from selling to anyone outside the family and define when, who, what and how the company will redeem the shares," says Mike Cohn, a family business consultant and head of the succession-planning division of CFG Business Solutions LLC in Phoenix.

"Any of the four Ds-death, divorce, disability or disillusionment-can trigger the desire for a stock redemption," says Peg Eddy. "If the company has a buy-back plan in place, money is generally put away into a special, segregated account called a sinking fund, specifically used to redeem shareholders' stock."

But a company must maintain the right to control whether it will seed the fund each year so that it doesn't put itself at risk. Says Cohn, "It should only be done in years when the company has been profitable and has enough cash."

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This article was originally published in the August 2000 print edition of Entrepreneur with the headline: Stock of Ages.

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