Preserving Family Harmony through Added Liquidity

By Terry Hannafin

  

Family Business Challenge

A 3rd generation, northeast-based publishing company’s shareholders and its Board of Directors reached a chapter in its company life faced by many multi-generational privately held companies – How do we provide liquidity for our growing and increasingly diverse shareholder base without diluting our balance sheet or curtailing the growth of the company?

Like for many family companies, the lethargic return of our economy coupled with global and geo-political uncertainties evoke uneasy memories of the not-so-distant financial crisis. In an industry facing continual headwinds, the shareholders and management team navigated a tumultuous path and are now standing again on solid financial ground. On the family side, the ownership of the company is split almost evenly between two distinct branches of the family. One branch is involved in the management of the company (including CEO). The other branch is geographically removed from the company with limited involvement in the Company’s affairs.

Tempered by financial conservatism, the Board assembled a Liquidity Committee to address the increasing demands for shareholder liquidity among the family shareholders.

As one Committee member said: “Our objective is simple: Provide liquidity…with one caveat…we don’t want to sell the company and we don’t want to exhaust its cash surplus or hamper its future growth.”

Solution
The committee enlisted the expertise of de Visscher & Co.’s financial consulting services to family businesses to assist in reviewing existing dividend policies and developing liquidity programs for its shareholders.

At the heart of every assignment needs to be a clear understanding of the shareholders’ objectives. We conducted confidential interviews and surveys with each of the shareholders and members of the Board covering a spectrum of topics beyond just liquidity goals. These discussions elicited a broader and deeper understanding of concerns of family ownership and heritage, corporate governance, financial performance and satisfaction with being a patient investor in the company. We learned that despite varied and real liquidity objectives, the family harmony was indeed very strong.

Our assignment was focused on two fronts: dividends (current liquidity) and internal redemption programs (ongoing liquidity). The historical dividend policies were inconsistent and redemption policies were insufficient and ambiguous. Our objective was to recommend solutions that not only met the shareholders’ needs but were also transparent, fair and within the financial means of the company.

Dividends
Our dividend policy recommendation called for an annual market-driven, yield-based approach that fairly accounted for valuation increases (or decreases) using a multi-year average valuation. The dividend amounts, proposed and set annually by the Board, were to be in-line with industry and market benchmarks, accounted for in each fiscal year budgeting process and communicated to the shareholders.

Redemption Program
We recommended an internal redemption program called an Annual Redemption Fund Program (“ARFP”).  The ARFP is a mechanism to allow shareholders, annually, to internally trade shares at a pre-determined, formulaic price (which again, fairly accounts for swings in valuation).  Furthermore, the ARFP calls for the Board to allocate certain funds to supplement redemptions beyond inter-shareholder exchanges. While there is no obligation to buy or sell any shares, simply having the option releases much of the pent-up illiquidity pressure.

By collaboratively working with de Visscher & Co., the Committee was able to recommend actionable, near-term solutions to address the liquidity and income needs of the shareholders. Additionally, the Board of Directors was restructured to allow for more expansive family representation. The combination of effective liquidity programs and fair and transparent governance structures further solidified the family harmony to maintain the family’s patient capital for generations to come.

The next challenge will be the inclusion in the family and corporate governance structure of a growing 4th generation of owners. But that is another chapter…..

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