You run a family business with several shareholders – but what would happen if one of them wanted to sell shares? You may think your cousins have no right to sell the shares they inherited from your grandfather, however they may think differently. As always in family businesses, anticipation is essential.
The last thing you want to happen is to be surprised with the sudden decision of some of the shareholders to sell a chunk of their shares – with no process in place, no agreed-upon valuation, and no cash to buy them out. Family shareholders may have many different reasons to sell shares:
A liquidity plan, giving owners the option of selling their shares, with a process and a valuation that can be judged fair, is an important part of family business governance; in fact, it’s a factor in the continuity of family ownership. A liquidity plan must meet two objectives: allow shareholders to sell shares, and avoid the unsolicited arrival of outside investors. Such a plan can take many forms.
From significant “liquidity events” that take place every few years, financed by unusual cash inflows, such as the sale of assets – to an “internal stock market” with an annual valuation of shares and a matching of buyers and sellers.
Components of permanent liquidity plans typically include pre-emption clauses, a process to inform the board or family council of the decision to sell, a valuation process, and a pecking order of potential buyers (some family members may be entitled to priority rights to buy, e.g. family members from the same branch, family members with fewer shares, the holding company, etc).
Many family firms have discovered that shareholders complaining of a lack of liquidity seldom use all the possibilities offered by liquidity plans when these are put in place. As one family leader put it: “When shareholders feel that they can’t sell, they think about it a lot. But once they know they can sell, they rarely think about it anymore.” Because shareholders may have different reasons to sell, other measures may have an impact on their attitude to ownership.
Among some of the actions to consider are:
The closer family members are to the business, the less they may want to sell…especially when they know that there is a liquidity system in place!