In the life cycle of a family business, one common event is the purchase by one or several family members of the interests in the business held by other family members. Because of the family relationships inherent in such transactions, it’s easy for something to go wrong and either delay the transaction or even squelch it entirely. Families who have been successful in completing buyout transactions have followed some basic rules for preserving family relationships while engaging in significant transactions with each other.
- Plan ahead and don’t rush each other. Nothing breeds distrust and suspicion more than the perception that one family member is looking to take advantage of another, either by insisting on aggressive timing or by being pushy. This is true whether a family member is a buyer or a seller. A pushy buyer almost ensures that the seller will react negatively; a pushy seller communicates desperation and may undermine his or her own negotiating position.
- Obtain a professional valuation. Unless there is an existing shareholder agreement that provides a valuation methodology in any transactions among family members, it is to everyone’s advantage in negotiating a transaction that there be an independent appraisal. Fairness is the key to completing the transaction and maintaining positive family relationships, and neither the buyer nor the seller wants to be in the position of looking back on the transaction with regret or suspicion.
- Take long-standing attitudes and personality styles into account. Often, family members know each other better than anyone else. They know of particular personality qualities or past instances that have given rise to unusual levels of loyalty, or even resentment, jealousy or envy. Sometimes these attitudes are manifested in the discussions leading up to a transaction, sometimes they are deep-seated psychological feelings, and sometimes they are surprisingly childlike—“Mom/Dad always liked you best.” Recognizing these attitudes and steering the transaction in a way that respects feelings will help ensure success.
- Utilize trusted advisors. Unrelated advisors who have the best interests of the family in mind can be of immense usefulness in aiding effective communications and smoothing over any tendencies on the part of family members to become suspicious or distrustful. Of course, ideally, each participant in the transaction will have his or her own legal counsel and other advisors, and will have the benefit of an advocate in any negotiations. Those advocates can insulate the parties from some of the more painful elements of any negotiation, and can also serve as lightning rods for any emotion generated by the transaction, allowing family members to continue to respect each other.
- Work with arms’-length terms. Transactions among related parties are best negotiated when each party and its advisors know what a similar transaction would look like if it were negotiated at arms’-length among strangers. Of course, sometimes a family transaction includes elements of generosity and/or tax and estate planning, which might shade the terms of an agreement away from the appearance of an arms’-length transaction. But in general, beginning with arms’-length terms and staying within those terms will provide a transaction that will be successful for all parties.
Keith Baldwin is a business transactions and securities lawyer with a thirty-eight year history of serving clients’ legal needs. Keith focuses his practice on business relationships, including mergers and acquisitions, agreements among owner-entrepreneurs, and best practices for corporate governance. Keith can be reached via email at email@example.com or directly at 425.646.6133.