Consolidating ownership: What Are Our Options?
9th January 2018
In our last family business ownership blog we looked at some of the reasons why a family might decide to consolidate ownership of their business. Today, we’re looking at some of the ways you may go about doing it.
Consolidating ownership is no easy task. As the family and the business develop across the generations, adjusting your firm’s ownership structure accordingly can be a challenge, both technically and emotionally.
To ensure you are taking the best possible steps for your own business, we would always suggest seeking expert advice. The advisor needs to be someone who understands your family dynamics and who the family trusts. This will help you ensure that all voices are heard and all available options are explored.
Buying others out
The most common way to go about consolidating ownership is for one family branch or individual to buy another out, for a mutually agreed price. This can be a very effective option, but when rushed or not carefully agreed upon by all stakeholders, it can also lead to resentment. In the long run, this can be detrimental to the functioning of the company as well as family relations.
Internal share markets
The creation of an internal share market can be a helpful option when you are looking for a more long-term solution to consolidating ownership. When creating internal share markets, shares are usually traded at a considerable discount, because only a small percentage of the business is on sale at any one time. If choosing this path you should keep in mind that, whilst shareholders will get fair value, it may not be full value.
Company buy backs can offer a fair solution to the question of consolidating ownership because all shareholders get offered equal value and have a free choice as to whether to sell or not. On the other hand, this option needs to be carefully weighed.
To buy back a sufficient proportion of shares, a company may need to draw a significant amount of cash from its reserves, which could have been alternatively invested elsewhere in the business. Furthermore, when cash reserves are not enough for buybacks, the firm may be forced to borrow, which could in turn affect the business’s credit worthiness and cash flow position, particularly in the short term.
Dividing assets by family branch
Different parts of a business often have different value, both in terms of assets and their ability to generate future revenues. It is important to keep these differences in mind when valuing and dividing assets.
More often than not, it is difficult to achieve a neat split. To balance the differences, one part of the business may have to pay another in cash. This works well when there is enough liquidity, but when this is not the case, you may face similar challenges as those above.
Carefully examine your options
As with all things family business, there is no one size fits all solution. Each has its advantages and disadvantages, all to be carefully considered.
As you undergo this process, there are a few aspects to keep in mind. Patience as different processes are evaluated and put in place, good communication between all shareholders and transparency will help to ensure everyone is aligned. This is crucial to avoid misunderstandings and conflict, which can have long term ramifications for your family relationships and your family business itself.
Consolidating the ownership of a family business can present some short term challenges, but if these are addressed properly, the long-term benefit can be much greater.