Families Between Needs for Liquidity and Capital

Financial Advisor Guides:
Families Between Needs for Liquidity and Capital
Family Business Forum News
by Jim Klaes

Francois M. De Visscher knows all about family businesses.His one family controls a multi-billion-dollar steel wire manufacturing company that has been based in Belgium for more than one hundred years.In addition, he is president of de Visscher & Company, an independent financial advisor for family-owned businesses based in Greenwich, Connecticut.

At UTEP in February, de Visscher gave some guidelines to members of the Family Business Forum about the ways to solve the capital and liquidity needs of their family businesses.

“We all, and this includes my family business too, tend to plan our individual financial needs for the future,” he said, “but we don’t plan our business’ financial needs nearly as well.Being a company’s owner as well as its manager gives you a different perspective than just a professional business manager would have.”

de Visscher’s own perspective is to balance a business’ need for cash with the needs of family members who want the same thing.How do you keep the business growing and, at the same time, satisfy the family’s need for money?

You could sell the business to create the liquidity that family members, particularly minority shareholders, want.It would also help pay any estate taxes that might exist,for instance, and also allows for reinvestment of the proceeds for the future benefit of the family.It has another benefit, too.Selling the company allows family members to diversify their investments, giving them a measure of safety they don’t have when all their wealth is maintained in the family business.

However, balanced against these are the reasons NOT to sell the family business.These include:

Control–The family history is tied to the business; the pride that comes with ownership of a successful company is considerable,not to mention the business opportunities that can be passed on to following generations.
Capital–There are distinct competitive advantages when a company is held, such as undisclosed financial figures.This can help the company’s performance as well as be a lure to attract outside management.
Liquidity–The family business is a wealth-creation vehicle that can continue to grow and earn dividends for many years to come. It is often more advantages to keep the company because dividends far outweigh what could be earnedby the same money in other investments.
“By far the most important thing I will tell you today” said de Visscher, “is what I call the Family Business Triangle. It is made up of Family Control, Business Capital Needs and Shareholder Liquidity. Everything you do in one of these three areas affects the other two, and this is not so in a non-family business.”

Besides the Family Business Triangle, another issue that affects the delicate balance between business and family financial needs is what de Visscher called Generation Transition. He noted that, because of the Baby Boomers, over fifty percent of all family businesses in the United States will face a generation transition within the next five years.

Other considerations include Strategic Transitions (changes in the business brought about by NAFTA, GATT, and the advent of a true global economy) as well as Ownership Transition (who will carry on the family tradition in the company)?

de Visscher then offered two possible solutions to the families present who might be struggling with their own balancing act between the need for business capital and for shareholders liquidity.

One is to create an Annual Redemption Fund in which the company sets aside a percentage of profits or earnings each year in order to buy back shares that family members wish to sell; thus keeping control of the stock within the company,yet allowing family members to access their wealth.

The other is to set up an Opportunity Fund within the company, by which young members of the family can access funds to help them start new ventures. This helps both the family and the company. Young people gain experience and the company builds a more diversified financial base. It’s a win-win situation.

After lunch, participants broke into groups to discuss two examples from de Visscher’s files, humorously renamed to protect the guilty.There was lively point-counterpoint on all sides as the different generations within each group interacted on the issues. It was quite a learning experience for all concerned.