Lending Money to Family Members

UMassby Stephen J. Simurda
adapted from Family Business magazine

Even Shakespeare warned against it. “Neither a borrower nor lender be. For loan oft loses both itself and friend,” he wrote in Hamlet. Somehow, though, I bet the bard never wanted to start a small business or go back to graduate school only to find himself a little short of cash.

Still, the point he makes has become something of a conventional wisdom these days. Many people feel that it can only lead to trouble to loan money to those close to you. At the same time, family members loan each other money all the time, for reasons ranging from the serious (starting a new business or buying a first home) to the spurious (paying off the $300 you just lost betting on football game). What are these lenders risking, besides just money, when making these loans?

“The danger is that it creates opportunities for family conflict and disappointment, and family businesses usually do all they can to avoid any kind of conflict,” says John Ward, professor of private enterprise at Loyola University Chicago who often works with family businesses. Ward says that too often loans to family members become “tests of personal responsibility,” rather than simple financial transactions. Terms and expectations are left unclear, leaving both sides vulnerable to feelings of unfairness or betrayal. And, in many cases, loans are never repaid in full, leaving bad feelings on both sides. More…

Bridging the Valuation Gap

Determining what a Share of Family Business Stock is Worth can Lead to
Conflict Unless Middle Ground is Found

by François M. de Visscher

Disagreements over the valuation of family business stock are prevalent and increasing today. The rising public equity market, combined with the current hot acquisition environment, has widened the gap between the high valuations shareholders can obtain from buyers and the low valuations that help minimize gift and estate taxes.

The situation is even more complex in families that are already transferring ownership to the next generation. Often there is an expanded shareholder base composed of relatively well-educated and sophisticated baby boomers. When these savvy owners seek liquidity of their stock, their value expectations are substantially higher than the “estate valuation” sought by their seniors for succession transfers and intrafamily buy-sell agreements.

The question for current owners is: In which direction do I go? More…