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When a major shareholder wants to sell
Can their problem be solved?
By Dr. Donald J. Jonovic
Problem: How should a family respond to the demands of a major owner who suddenly wants to sell out?
Submitted by K.T. via email:
I have a very large family farm in South Dakota. The land has been in our family for four generations, and a number of businesses have been added over the years.
Almost from the beginning of the farm, parents taught children that the farm was the future and each generation only served as a custodian of the assets for future generations.
Last month at a large family celebration, we had an earthquake, you might say. My sister announced she wanted to sell some of her stock. She’s become increasingly alienated over the past five years or so. She said she wasn’t doing this for money – she just wanted to know if her stock was worth anything.
Our shareholder agreement doesn’t provide any formula for setting value, nor does it give any of us the ability to demand that our shares be bought out. Yet, my sister demanded we make an offer for 25% of her shares.
We reminded her of these facts. Trying to be reasonable, we suggested that she make an offer to sell at a specific value. The conversation got very tense. She said she would talk to her lawyer and get back to us. She then left the room. We were all stunned.
Buying her shares would drain value from the business and cut her children out of a legacy that took years to build.
How do we decide between holding to the status quo and keeping everything together or betraying our family values by allowing a stock sale just because she’s angry?
Dr. Jonovic's solution:
I’ll always remember the tone of deep pride and the glittering eyes of a farm owner as he assured me his children knew their main responsibility was to be custodians of the business for future generations. “I told them they should look at their shares as wallpaper,” he said.
Although these are different words from those used by K.T., both express the same deeply held belief in the value of stewardship.
The drive to build for future generations has always served as proof for entrepreneurs and business builders, a purpose that nourishes and supports them through the struggle.
These are powerful, positive drives. Yet, by their very strength, they make it too easy to forget that assets are means – not ends – and that future generations are composed of real people, each with individual dreams, values, and needs.
The preservation of family unity over generations is best assured where families combine husbanding of wealth with responsible delivery of its benefits to those who are asked to protect it.
K.T. poses a false choice. The decision doesn’t have to be between holding everything together or betraying family values. Important questions remain unanswered.
“Why has our sister grown alienated?” is a much more important question than “Should we buy her out?” Has the family done enough to show why the farm is valuable?
For example, assets can be structured so owners can get income from property or can set a conservative cash distribution policy.
Why not adjust the business model to help meet today’s human needs for tangible returns rather than force heirs to choose between bearing burdens without reward or giving up those assets in order to get any return at all?
As the Bible’s King Solomon knew, forcing severe choices has the potential to destroy the very values K.T. is trying to protect.