Value-Out Owners or Custodians?
Ownership policies in a family business need to be designed to reflect whether your family want to be value-out owners or custodians?
Value-out owners expect a market rate of return and if this is not achieved then, like any rational investor, they will want to sell their stake and invest in something else.
Custodians, on the other hand, attribute value to returns that are not based on immediate financial reward, or they measure return over a longer period. For example, the custodian may want to create or maintain a legacy of family ownership to pass to the next generation or look after the interests of other stakeholders like employees. These returns on investment motivate a custodian even if they incur a short-term financial cost, but they would make little sense to a value-out owner.
Why does this matter?
The different attitudes must be reflected in the policies governing sale of shares and payment of dividends.
Value-out owners will expect to be able to sell shares when they want and receive full market value. In a company whose shares are not traded this might involve revaluing assets to reflect their market value rather than book value and never discounting the value even if the owner has a minority stake.
None of this will make sense to a custodian who assumes that there will be a limited opportunity to sell and that the valuation should be less than market value because sale goes against the grain of a custodian mentality.
Custodian / steward
What can the business afford?
Based on annual profits
Pay from positive cash flow
Value out owner
Expects a market rate of return
Use distributable reserves if annual profits are low
Borrow to fund dividend payments
Presenting these different ownership attitudes as if you are either one or the other is artificial because often families combine the different attitudes; for example, ‘we favour custodian more than value-out, but we still want a reasonable dividend.’ However, presenting the alternatives in this manner will help a family make choices and assist their advisers in developing policies that reflect the family’s unique alloy of ownership attitudes.