Sages Business Case: Planning ownership for future generations

Sages Business Case: Planning ownership for future...

Previously in the series:

Bernard, Christophe

Adjunct Professor of Entrepreneurship and Family Enterprise, INSEAD

KPMG contributor


Related content

  1. Introducing KPMG’s Sages Family Business Story
  2. The Sages Family Business Story: An entrepreneurial success
  3. The Sages Family Business Story: Planning the future
  4. Sages Business Case: Estate Planning for the family business
  5. Some Key Learning Points about Estate Planning for the family business
  6. Sages Business Case: Financing growth
  7. Some key learning points about financing growth for the family business

A shareholder’s agreement

“Caroline said goodbye to her brothers Louis, Charles and Timothy, and rushed to her car, very satisfied with the decision that had been made. They had agreed to develop a shareholders’ agreement to secure the future ownership of the family business while giving some flexibility to individuals to sell shares.

She could now go and visit her father Thomas Sages to share the good news. Thomas Sages was a very successful entrepreneur who had transformed his first grocery store into a large supermarket chain over the past decades. He was in his late 80s now, and had initiated a conversation with his four children about the future of the family business.

Contrary to what he had expected, each of them had expressed the wish to become, or remain, a shareholder in the business as they wished to be in a position to pass on some shares to the next generation.”

Passing on shares to the next generation

“The Sages family circumstances (Thomas’ two marriages and prior distribution of shares to his second wife and their children; Caroline’s husband David’s ownership; and a transaction between David and Timothy), would result in an uneven distribution of the shares between the four children upon the demise of Thomas and his second wife Martina.

The four siblings were aware that there may be a requirement for them, or their children, to sell part or all of their shares in the future. It was therefore important to plan ahead, while at the same time trying to avoid the entry of an external investor. They had considered the following:

  • What would be the process if someone wanted to sell his/her shares?
  • How would the transaction price be established?
  • Would other family shareholders have a pre-emption right?
  • How would that work if there were more buyers than sellers?
  • Would shares be allocated in proportion to the existing stakes, or would priority be given to those with fewer shares?
  • What would happen if there were fewer buyers than sellers?
  • Would the company buy the shares?”

The agreement drafted by the second generation

While they had listed their preferred options, they now needed to further discuss the matter with their trusted advisor. The four siblings decided that they would meet at least once a year to talk about ownership matters. The topics that they would address would include their marital financial agreements, plans for donations to their children, and, last but not least, whether or not they wished to keep their shares.

They also decided to hire an expert to value the business annually, at the time of the close of the annual accounts. The method used would be the same year on year. In order to encourage family ownership, they agreed that shares would be traded among themselves at a discount on the valuation. After much discussion they agreed upon a 15% discount.

The shares will first be offered to the other siblings. When demand for shares exceeds the offers, shares will be allocated proportionally to the buyers based on ownership percentages; and when offers of shares exceeds demand, the company will buy-out the remaining shares. A cash reserve would be built at the company level to ensure sufficient liquidity.

Each family will find its own path

The four siblings also decided to look into the possibility of setting up a holding company to pool the family shares. The holding company would retain dividends to create the liquidity fund, and transfers of shares would take place in a restricted environment. The Sages family selected this approach from the different options considering it to be the best for them.

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