In a family business, there are several threats to remaining family-owned. One risk is that the whole family loses interest. Another is that the industry moves in a direction that the family can’t accommodate, so the business stops adapting to the marketplace and is no longer viable.
But there is another big risk that families almost always have the ability to manage with extra diligence and planning. I’m talking about the risk involved in not managing family relationships. If families don’t invest in the relationships as much as they’re investing in the business and the board, they run the risk of a disgruntled shareholder or a family branch doing their best to make everyone else miserable. An even bigger risk? The possibility of that disgruntled individual or faction deciding to sell their share of the family business.
Agreeing to a stock sale is often an attempt to buy your way out of your problems. But the lasting damage that that does to a family is pretty significant. Even if the family feels like they’ve set this group or this individual free, there’s always going to be a feeling of loss. It will leave a hole in your family fabric that you can’t see in advance, but it’s one of the negative legacies you’ll be passing down to future generations. Like a sudden death, buy-outs remove the opportunity to heal rifts or solve problems within the family. It impacts the family long term because any problems that exist now are frozen in time. The resulting pain is going to be part of your family forever.
Buy-outs are also problematic because sometimes they’re only a temporary solution to conflict. If the family has any kind of trust or estate plans already in place, someone could end up inheriting stock back again. It will be even harder to mend fences if an inheritance brings an individual back into the family business after a buy-out.
Buy-outs can have a negative impact on the business itself because they reduce the operating capital that the business can use to grow. You’ve shrunk the size of the business if you take out a shareholder or an entire group of shareholders. You’re also sending a message to your board and your management that you don’t have unity within the family, and that your family is not in alignment with the business and the board.
In the families I’ve spoken with, buying out a troublesome individual or branch doesn’t end up feeling like a good resolution. There may not be open conflict any more, but the conflict has been replaced with the sorrow of having lost a family member or an entire branch of the family.
It’s also not a good resolution for the people who left the family business. Buying your way out of a problem rarely works, because the underlying issues follow you. It’s better to try to address the issues that are causing strife, even though the process can be quite painful. An individual or branch who feels disenfranchised or disgruntled probably has a legacy of reasons of why they feel that way.
There are situations where a buy-out is really the only options, but those situations are in the minority. If the people involved don’t want to resolve things, it’s almost impossible to force them to heal the rift. Sometimes people are in so much pain that they want to create pain for other people. They want to create a problem, and there’s not much you can do about that. There are people you cannot make happy, no matter what. In that case, a family needs to figure out how to prevent those people from driving their entire agenda. It’s easy to give unhappy individuals too much power. That’s because when a family sees someone in pain or upset, their instinct is to try to fix it. Instead, it’s important to focus on the happy majority, people that are happy with the business, the family, and the board. Figure out how to cater to the larger, more positive group, while trying to bring the disgruntled shareholders back into the fold as much as you can and keep that dialog open.
I’ve found when you do that, the unhappy people are not in the spotlight any more. It becomes less fun to jerk people’s chains. When someone refuses to negotiate or accommodate, they are really in control of the entire family. Taking away their ability to rattle everyone takes away some of their power.
This method may prevent a family from going down the path of buying someone out, but don’t think that this path will be easy. It’s much harder to do the work of trying to keep the family together. This requires everyone to take a hard look at themselves and their involvement in the family, to figure out whether the unhappy person has legitimate complaints, and look for ways to make changes or concessions to accommodate this unique voice in the family.
When you don’t take the easy way out, it’s a net positive. In implementing ways to pull this person or group in and trying to move forward in your agenda, you’re taking control of that individual group and you’re moving that family forward in a really positive way. The family and the business will both be stronger as a result.