When a shareholder wishes to leave

The request is rarely the problem

A shareholder wishes to leave. Perhaps a sibling going through a divorce, or a member of the third generation who lives abroad and feels no connection to a company they have visited twice.

This is normal. Families grow, and the further a generation stands from the founder, the weaker the pull of the shares.

The problem is almost never the request. The problem is that nobody has thought about it before, so the family is now designing an exit route while an emotional negotiation is already underway.

Why families freeze

Two things happen at once. The person leaving hears that their wish to go is being treated as a betrayal. The people staying hear that money is about to leave the business at a moment when it can least be spared.

Each is usually misreading the other, but by the time anyone realises it, positions have hardened and lawyers have been retained. A well-drafted exit provision exists precisely so that trust is never tested in this way.

The five questions an exit provision must answer

Write these into the shareholders' agreement and reflect them in the family constitution. Settle them while nobody wishes to leave.

• Who may sell? All shareholders, or only those outside the operating business? Is there a minimum holding period?
• To whom may they sell? The company, a family trust, other family members, or an outside buyer as a last resort?
• At what price? The single most contested point. McAllen Agency suggests settling the method now.
• On what timetable? A right to sell that can be exercised at any moment is a liquidity risk to the business. Notice periods and windows are ordinary.
• How is it funded? A right to be bought out is worthless if the buyer has no cash.

Valuation: settle the question in advance

Every family that has not agreed a valuation method discovers, at the worst possible time, that they have two irreconcilable views of what the shares are worth.

The seller believes the multiple should reflect the last strong year. The buyers believe it should reflect the reinvestment still to come. Both are arguing about money while claiming to argue about fairness.

Agreeing a method in advance removes most of this. Common approaches include:

None of these options is perfect; each is better than a dispute.

Funding the buyback

This is where good provisions still fail. The valuation is fair and the mechanism works. Yet the company simply cannot pay.

Options families use:

• Payment in instalments over an agreed period, with interest, secured appropriately
• A sinking fund built up from dividends over years, held for exactly this purpose
• Debt raised against the operating business, which requires the bank to be comfortable with the reason
• A partial exit, where the leaver sells down over stages rather than all at once

The instalment route is the most common and the most often resented. If you use it, agree the interest rate and the security up front. A leaver who feels they are financing the family's convenience will not leave quietly.

The conversation itself

The mechanics can be handled. The relationship is harder. The people staying should be told plainly that an exit is permitted, and that using the provision is not a hostile act. Otherwise the family creates an exit route that nobody dares walk through, which produces trapped shareholders. These are the most dangerous kind.

The person leaving should be told what the family expects afterwards. Do they remain in the family council? Are they still at Christmas? These questions sound trivial next to a valuation. They are not, and they will be the ones that people remember.

Where families get this wrong

They write an exit provision, then quietly signal that using it would be a disgrace. The provision then sits unused while a shareholder who wants out stays in, obstructing decisions and pushing for dividends the business cannot afford.

A family that cannot let someone leave has not solved the problem. It has just moved it inside the room.