• Service: Enterprise, Family business
  • Type: Business and industry issue
  • Date: 2/14/2014

Why you need a “liquidity plan” for your shareholders 

Why you need a “liquidity plan” for your shareholders
You run a family business with several shareholders – but what would happen if one of them wanted to sell shares? You may think your cousins have no right to sell the shares they inherited from your grandfather, however they may think differently. As always in family businesses, anticipation is essential.

The last thing you want to happen is to be surprised with the sudden decision of some of the shareholders to sell a chunk of their shares – with no process in place, no agreed-upon valuation, and no cash to buy them out. Family shareholders may have many different reasons to sell shares:

  • On a positive note, they may need cash to finance a project, such as a new business venture, a house for a child, etc.
  • They may not have children to pass the shares on to
  • They may also have negative reasons to sell, perhaps disgruntled by bad work experience in the family business, some other kind of conflict, or because they feel detached from the line of business
  • Last but not least, their willingness to sell may be fueled by the fact that there isn’t any possibility of selling and thus they feel trapped.

Family shareholders selling shares

A liquidity plan, giving owners the option of selling their shares, with a process and a valuation that can be judged fair, is an important part of family business governance; in fact, it’s a factor in the continuity of family ownership. A liquidity plan must meet two objectives: allow shareholders to sell shares, and avoid the unsolicited arrival of outside investors. Such a plan can take many forms.

From significant “liquidity events” that take place every few years, financed by unusual cash inflows, such as the sale of assets – to an “internal stock market” with an annual valuation of shares and a matching of buyers and sellers.

Components of permanent liquidity plans typically include pre-emption clauses, a process to inform the board or family council of the decision to sell, a valuation process, and a pecking order of potential buyers (some family members may be entitled to priority rights to buy, e.g. family members from the same branch, family members with fewer shares, the holding company, etc).

A liquidity plan

Many family firms have discovered that shareholders complaining of a lack of liquidity seldom use all the possibilities offered by liquidity plans when these are put in place. As one family leader put it: “When shareholders feel that they can’t sell, they think about it a lot. But once they know they can sell, they rarely think about it any more.” Because shareholders may have different reasons to sell, other measures may have an impact on their attitude to ownership.

Among some of the actions to consider are:

  • A venture fund (with clear rules and processes) to support new projects, so that family members who have entrepreneurial projects can apply for support without having to sell their shares
  • Access to estate planning advice in order to anticipate the gift or sale of shares
  • And most importantly, all those measures that reinforce the fondness family members have for the business. This includes providing information about the business, fostering communication, and regularly organizing both owners’ and family meetings.

The closer family members are to the business, the less they may want to sell…especially when they know that there is a liquidity system in place!

For further reading

  1. Financing transitions, managing capital and liquidity in the family business, F.M. de Visscher, C.E. Aronoff, J.L. Ward, FBCG publications, Marietta, 2008

Christine Blondel

Christine Blondel
Christine Blondel is adjunct professor of Entrepreneurship and Family Enterprise at the Wendel International Centre for Family Enterprise at INSEAD.

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