Shareholders

What began as a more or less regular gathering of the four Flanagan brothers for high-level discussions about ownership of their business took a new turn in the fall of 2012. Two of the siblings, Murray and Rick, said they wanted to look into selling their shares in Flanagan Foodservice.

Their brothers weren’t surprised. They knew Murray and Rick had thought about leaving the business and had chatted about what else they might do.

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In 2014, members of the family that owns Sycamore, Ill.-based IDEAL Industries participated in what was to be a routine telephone meeting to discuss arrangements for an upcoming Family Business Network conference. "It was the first time we were going to a conference as a big group," recalls Jamie Tucker, a fourth-generation family council member. The family's Development and Education Fund planned to cover the cost of conference attendance.

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When a family business stakeholder group is small enough to fit everyone around the dinner table, the family values and business mission are communicated naturally, and important company developments are brought up in everyday conversation. But once the family moves into the third generation, it becomes harder to get everyone in the same place and on the same page.

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At this year's Laird Norton Family Summit, held in June, close to 300 members of the family that owns Laird Norton Company LLC gathered in San Diego—far from the diversified holding company's Seattle headquarters. They heard how the company is doing. They also learned from family president Allison Parks about family members' service to the company and philanthropic contributions in the past year.

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Families experience significant and sometimes difficult changes over the years as elders pass on and new family members grow into leadership roles. Amid such transitions, doing things the way they've always been done can be a recipe for disaster. What worked for a two-generation family with five members may not work when the family reaches the fourth generation and now involves multiple households, varying wealth structures, different liquidity needs and geographical separation.

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There are many reasons why a family company ceases operations, but one routinely missed by family business boards, CEOs and advisers is the failure to view the family business as an "investment asset" rather than an "operating entity." This often results in disruptive family dynamics over time, since individual shareholders have differing investment objectives and needs. It also exposes families to inappropriate investment concentration and unrecognized "tail" risks, and causes them to incur lower family shareholder realized return with less liquidity.

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When the Affordable Care Act (ACA) went into effect in January 2013, it came with an unexpected consequence that family business shareholders are still scrambling to understand. The new 3.8% tax on earnings hits shareholders who are considered passive investors in S corporations—generally those who work fewer than 500 hours a year in the company. As many of our clients are discovering, the financial impact of the tax can quickly jump to the six figures and continue to increase as the company becomes more successful.

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The families who own Leupold & Stevens have spent more than a decade creating a governance structure that gives them the best of both worlds—a company with non-family management that more than holds its own in a competitive marketplace while reflecting and preserving the values of its family shareholders.

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Shareholders in family companies frequently come into conflict as the company grows, the shareholder mix changes, generations succeed each other, outside investors appear and non-family professional managers are hired. The biggest divergence of interest develops between shareholders who actively participate in the management of the company (“insiders”) and those who do not (“outsiders”).

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In addition to general business challenges—like the economy, competition and the need for product innovation—family-owned companies must contend with issues unique to family businesses, such as the need to preserve harmony. But potential family disagreements need not threaten the survival of the business. Early and proactive planning before the issues arise enables family businesses to successfully navigate internal and external pressures.

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