Top Ten Questions Not to Ask at Thanksgiving Dinner

Capital Structure Dividend Policy FAQ M&A Special Topics

For most of us, Thanksgiving is a time to disregard normal dietary restraint in the company of extended family members that one rarely sees.  For some enterprising families, however, Thanksgiving quickly devolves from a Rockwellian family gathering to a Costanza-style airing of grievances.  So, in the holiday spirit, we offer this list of the top ten questions not to ask at Thanksgiving dinner.  If you have trouble distinguishing between the board room and the dining room, this list is for you.

1. Why can’t I work in the family business?

Nearly all family businesses welcome the contributions of qualified family members; however, having the right last name is not a sufficient condition of employment for successful family businesses.  As families grow into the third and subsequent generations, family employment policies can become especially contentious.  Crafting a workable family employment policy that specifies required qualifications and external work experience is often one of the first and most important tasks undertaken by a family council.

2. Why does cousin Joe get such a big salary?

This can be a great question, and it is quite possible that Joe is either under – or over – paid relative to his contribution as an employee.  As family businesses grow, the board should carefully evaluate how compensation practices for family members compare to those for non-family members.  Working in the family business should be neither indentured servanthood nor a sinecure.  It is a job, and successful families treat it as such.  Having one or more independent (non-family) board members can be a great way to ensure that compensation practices in the family business are fair.

3. Why does cousin Sam get anything from the business?

This question gets to the heart of many family business disputes we have witnessed: the belief that family members who don’t spend their lives working in the family business aren’t entitled to any distributions.  Successful families are able to separate the return on labor (wages and benefits) from the return on capital (distributions).  Just as the family members providing labor are entitled to market-based compensation, family shareholders are entitled to distributions if and when paid, even if they don’t work in the business.  That’s simply what ownership is.  It works that way for public company shareholders, and there’s really no reason to treat your family shareholders any differently.

4. Why isn’t the shareholder redemption price higher?

A shareholder liquidity program can be a great way to promote peace in the family.  Even when a shareholder liquidity program exists, however, shareholders often don’t understand that the family business has more than one value.  Which value is appropriate for a redemption program depends on the family dynamics and goals for the program.

5. Why doesn’t the business pay a bigger dividend?

Being wealthy is not the same thing as feeling wealthy.  Many family shareholders are wealthy but don’t necessarily feel that way because dividends either aren’t paid or are only a token amount.  Having a well-reasoned and easily-articulated dividend policy is an essential step in promoting family harmony and sustainability.  Occasionally, founders and second-generation leaders withhold distributions simply on principle, even if the business has limited reinvestment opportunities.  This rarely ends well.

6. Why doesn’t the business invest more for the future?

This is the flipside to the previous question.  Funds that are distributed are not available to reinvest in the family business.  A single dollar of earnings cannot be both distributed and reinvested – a choice is required.  Making that choice wisely requires knowing what time it is for your family business.  As the family grows biologically, it is natural to wonder if the family business will, or can, keep up.  You have to sow before you can harvest.

7. Why doesn’t the business borrow more money?

Growth requires capital, and since family businesses rarely have an appetite for admitting non-family shareholders, that means debt may be the only way to fund important growth investments.  Prudent amounts of leverage to help finance growth investments can actually help secure, rather than imperil, the family business’s future.  But before borrowing money, directors should ask a few key questions.

8. Why does the business have so much debt?

Some shareholders fret about using too little leverage, while others worry about the risk of having too much debt.  Over the long-run, the capital structure of your family business should reflect the risk tolerances and preferences of your family shareholders.  The idea that you can financially engineer your way to a lower cost of capital (and therefore, higher value) for your family business through fine-tuning capital structure is over-rated.  Capital structure determines how much risk and reward shareholders can anticipate, but does relatively little to influence the actual value of your family business.

9. Why don’t we register for an IPO?

There are examples of families that have taken their businesses public while retaining control over the board of directors.  It’s not always a lot of fun.  Despite retaining control, being public means inviting the SEC and other regulators to take a keen interest in your business.  Even if your family keeps its eye on the long-run, Wall Street can take you on a wild ride based on the short run.  Having publicly-traded shares may be what’s best for your family business, but it’s a big step and a really hard one to take back.

10. Why don’t we sell the business?

When is the right time to convert the illiquid wealth that is the family business into ready cash?  A buyer might approach your family business with an offer that you weren’t expecting, or your family might decide to put the business on the market and seek offers.  In either case, you only get to sell the business once, so you need to make sure you have experienced, trustworthy advisors in your corner.  Selling the family business will not remove all the stresses in your family; in fact, it may add some.

Of course, all of these are really great questions to be asking – the Thanksgiving dinner table is just not the right venue.  This Thanksgiving, try setting business to the side for at least one day.  Our advice: instead of talking about the family business, stick to a safer topic like politics.  Above all, be thankful for the opportunity to be a family that works together.

Happy Thanksgiving!