Family Business

Shareholder arrangements in family businesses can be tricky

September 1, 2012 

Climbing Mount Everest, quitting smoking, losing weight, achieving bipartisanship in U.S. politics, finding peace in the Middle East, and winning an ACC football national championship – all are held out as supremely difficult challenges to accomplish. But this is only because not everyone has experienced trying to reach consensus in a family business with an equal distribution of ownership.

In family businesses, these are some typical shareholder allocation arrangements: fifty-fifty, thirds, quarters, or even more.

With such an alignment, it is difficult to understand what role Thomas Paine’s famous quote, “Lead, follow, or get out of the way,” has or how it can be enacted. But it is more applicable to systems where coalitions must be constructed to form a government. While one party may have the leadership role, it is only to the extent that it does not cross the boundaries of those who are not in the leadership seat at the moment.

Working as equal partners always begins with excitement and the highest of hopes. And when the business is doing well, the rocks are sufficiently covered up with water, ensuring that everyone’s boat is well afloat. There are family businesses that exist for many years with such financial success that the issues and disagreements that arise can easily be put to the side. However, these businesses are clearly the exception to the rule.

And while equal ownership is indeed difficult, one can quickly see that the even greater challenge in dealing with such a family business is when trying to pass it on to the next generation and maintain the sense of equality. The inherently complex issues of entry and exit timing, share imbalance, capability variation, and wealth transfer can become overwhelming and bring down a family business.

What is one to do?

While books are written on the subject, let me put forth three tenets here:

Communication key

Have a good buy-sell agreement in place. While such a document will force the family members to think though what should happen if a family member were to die, it will also clearly define the process of an owner leaving the business. Psychologically people are more willing to cooperate and stick to a project if they know that they can leave at any time, but once they are gone they cannot come back.

Communication. It requires sufficient quantity and quality. Communication needs to happen on a regular basis among family members, which means planning it, and it needs to be effective in order to avoid misunderstandings. And as not everyone is a great communicator, it is important to try to identify people’s communication styles such that they can be optimized and accommodated.

Dirk Jungé, a fourth-generation member of the Pitcairn family, and the CEO of Pitcairn, a multifamily office, says you need to train the family to communicate effectively. “For example, using “I” statements instead of “you”; being specific; and discouraging interrupting, comparing, and mind-reading (speculating on others’ thoughts).”

Code of conduct

Professionalizing the business. This means implementing and adhering to a code of conduct that reduces or eliminates the ability and mentality of family members to make decisions simply because they are owners or family members. One of the most common phrases heard in a family business is “This is my business; I can do whatever I want.” Yes, this is true. You are the king, this is your kingdom, and you can do whatever you want. But are you going to be a good king or a bad king? In the context of multiple owners or family members in the business, it means relinquishing a bit of your ownership or family mentality, and realizing to some extent that you are simply a resource working at the company like anyone else. To fully understand and implement this is to ask yourself, “If this were not a family business, how would we operate?”

There is a family business in the northeast where the first generation passed all the ownership to one of three sons. The other two sons work in the business for their brother. The company does extremely well, and so do all three brothers. Sometimes equal is not the best recipe for success. But if it is equal, it takes a conscience effort to make it work.

Henry Hutcheson is a nationally recognized family business speaker, author and consultant in Raleigh. He can be reached at Familybusinesscarolina.com.

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