On a recent trip to Australia I met an entrepreneurial couple who talked about the annual cash flush they provide to their children. When digging deeper the conversation touched on topics of ‘how much is enough’ and ‘how to keep them responsible citizens in their communities despite the money’. In our advisory work we often get involved in such discussions. Conflicts in families mainly centre about two issues: power (who leads the family company) and money (who gets how much access to cash). Let’s focus on the money for now.
CONFLICTS ARE EITHER ABOUT POWER OR MONEY
As long as all family members work in the family business, the monetary conflict usually can be managed. People see the need for re-investment to grow the company further. When the business as well as the number of family members grow and especially when you have more and more family members not actively involved in the business anymore, it is natural that those active in the business want to re-invest the profits and those not active in the business want to see their dividends grow. Reconciling the different interests becomes a source of contention.
LIQUIDITY POOLS CAN AVOID CONFLICTS
Successful families in business pro-actively manage this potential conflict. On the one side they introduce explicit dividend rules that state, for example, that not more than 25% of net profit should be paid as a dividend – that also prevents companies from paying dividends when there is no profit. This sometimes can be seen in family firms since the pressure from the shareholders is just too high. There are many examples where this leads to the hollowing out of the substance of the company.
On the other side we also see more and more the establishment of family liquidity pools outside the company to finance start-up ambitions of family members, as iron reserve for the family business, but also as a family fund to enable an internal capital market that allows family members an efficient way for selling and buying shares of the family company while keeping the shares under the family’s control.
MANAGING EXPECTATIONS IS KEY
Managing expectations is critical to avoid conflict – if people know the rules of the game, it is easier to influence their behaviour. Without proper rules of the game conflicts are programmed.
By Henry Hirzel • Senior Adviser - Family, Business and Wealth, UBS Wealth Management