The Importance of Dividend Policies for Family-Owned BusinessesIn our family business practice, we commonly see conflicts between shareholders who are active in the business and shareholders who are not active in the business. The conflict usually arises from the relatively rich compensation paid to the active shareholders (in the forms of salary, bonuses and other benefits) versus the relatively paltry dividends paid to the inactive shareholders. Of course, what is “rich” and what is “paltry” is often in the eye of the beholder. Without question, though, a lack of investment liquidity is a genuine concern for a family business owner who is not active in the family’s business.

It is important for family business owners to recognize that every business has a dividend policy—regardless of whether the directors and shareholders have ever even discussed one. What the company does with excess cash is its dividend policy. Does the company re-invest excess cash to grow the business? Does the company reduce debt or make an acquisition? Does the company repurchase shares? Or does the company pay dividends? If a family-owned business pays above market compensation to family employees, or purchases vehicles and vacation homes for the use of family members who are not active in the business, the company is in reality paying dividends to the family members who receive these payments or other benefits. How the company allocates excess cash flow among the various alternatives makes up its dividend policy.

In some cases, the board or controlling shareholders may make dividend decisions for the wrong reasons. Deferring dividend payments to keep money away from younger generation shareholders, or to avoid making distributions to certain minority shareholders, may lead to family conflicts and potentially legal disputes. Not paying dividends for the purpose of acquiring non-operating assets in the business, or to enable the controlling shareholder to pursue personal projects in the business, may also lead to problems.

There is no rule of thumb for how much a family business should distribute in the form of dividends. However, we find that family business owners who have thoughtful discussions about setting a realistic dividend policy, and who then follow their policy, are less likely to have conflicts.  In addition, paying dividends allows family business owners to invest assets outside of the business and diversify their portfolios.

Different family businesses will have different approaches to dividend policies. One approach is for the owners to set the expectation that all shareholders—regardless of whether they are active in the business—are entitled to receive a certain return on their investment each year. The shareholders, acting through the board of directors, can then direct management to operate the business accordingly. This approach tends to focus management’s attention on generating sufficient earnings and cash flow to meet the owners’ expectations. Outside consultants may be helpful in advising business owners on how to set realistic expectations and policies.

Implementing a dividend policy is a good way to minimize conflicts among business owners–and the key to establishing a well-functioning dividend policy that is open and encourages candid communication among the family business owners.

How to Protect Your Family-Owned Business from Environmental LiabilityEnvironmental liability can pose a significant danger to any business, with enforcement penalties and clean-up costs reaching into the hundreds of thousands, if not millions, of dollars, but family-owned businesses may be especially at risk if they are not well-equipped to comply with environmental regulations and assess potential environmental risks.

There are a few steps family-owned businesses can take to help avoid costly environmental liability:

1. Always perform a Phase 1 Environmental Site Assessment before purchasing property.

A Phase 1 Environmental Site Assessment (or “Phase 1”), following the ASTM standards, should be performed before your family business purchases a piece of property. This site assessment will help to determine if the site in question is potentially contaminated and assess other environmental risks associated with the property. Even if a Phase 1 has been conducted on the property in the past, it is good practice to request a new assessment, as the Phase 1 should be less than one year old at the time of acquisition of the property and certain sections of the Phase 1 may need to be updated if more than 180 days old.

Not only is a Phase 1 an important information-gathering exercise, it can also shield you from certain types of liability in the future. Under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), otherwise known as “Superfund,” liability for environmental contamination can be imposed on any current owner or operator of a contaminated property, even if the contamination at issue was not attributable to their actions. However, an owner can avoid liability under CERCLA through the Innocent Landowner Defense or Bona Fide Prospective Purchaser Defense. Both of these defenses require that the owner, at the time of purchase, undertook “all appropriate inquiries” before taking title to the property.

A properly conducted Phase 1, demonstrating that there was no contamination found on the property at the time of acquisition, is sufficient evidence to prove that the owner took “all appropriate inquiries” before taking title. If a statutorily compliant Phase 1 was not completed before the owner took title to the contaminated property, these defenses cannot be utilized and business owners may find themselves facing steep clean-up costs.

2. Voluntarily disclose and promptly correct environmental violations.

Another tool at your disposal to avoid costly environmental liability is EPA’s eDisclosure process. Under EPA’s eDisclosure policy, regulated entities are encouraged to “voluntarily discover, promptly disclose, expeditiously correct, and take steps to prevent recurrence of environmental violations.” Using the online eDisclosure system, businesses can easily disclose and resolve civil violations. If all of EPA’s conditions under the self-disclosure policy are met, certain penalties will be waived by the EPA.

To fall within the scope of this policy, a family-owned business must: (1) Register in the eDisclosure system, (2) self-disclose within 21 days of discovering a violation, and (3) submit an online Compliance Certification, describing how noncompliance was corrected, within 60 days of submitting the initial online Audit Policy disclosure (or within 90 days if qualified to submit a Small Business Compliance Policy disclosure). While it might seem counter-intuitive to disclose your company’s own violations to EPA, the eDisclosure policy ensures that voluntary disclosure, accompanied by prompt correction of the violation, will result in little or no penalty—a boon to the regulated and the regulator alike.

3. Take advantage of free resources to ensure compliance with environmental regulations.

A number of excellent free resources are available to assist businesses in complying with complicated environmental laws. The Small Business Environmental Assistance Program provides an email and telephone hotline that certain businesses can use to get quick answers to their environmental questions. This program also provides information on industry trade associations that can provide businesses with information and assistance in complying with environmental regulations that affect their industry. Each state also has a Small Business Compliance Assistance Program and contact person to aid in compliance with state regulations. Finally, the EPA compiles information on Compliance Assistance Centers, categorized by industry, that helps businesses understand and comply with environmental laws. By utilizing these resources, family-owned businesses can lower the risk of noncompliance and environmental liability at little to no cost.

Please contact us if you have questions about or need more information on environmental compliance for your family business.

So You Think You Want to Retire – Now What?Are you getting to the point in your life where you are thinking about retiring (or is the next generation dropping not-so-subtle hints)? If so, I have a recommendation. Last year my friend and colleague Rob Couch published So You Think You Want to Retire – Now What? I recommend it to you. Rob has a wonderful sense of humor that shines throughout the book. His subject matter is serious but his delivery is anything but.

I believe Rob’s book should be read by all high-achieving, hard-working business builders who are moving into the “next phase of life.” That is the phase where you reap the fruits of your labor or, according to some of my friends, it is the pasture into which you are put by your children. In any event, most founders and business leaders do not intend to leave this life while sitting at their desk. So, the question is: Are you prepared for your next phase? In my experience an honest affirmative answer is rare.

In the online article “The big thing everyone should think about before retiring – but almost no one does,” reporter Catey Hill observes that we plan for building wealth to retire and do our best to maintain our physical health so we can enjoy retirement but we rarely consider the psychological impact of leaving our life’s work. Consider the emphasis placed on “work identity” and how we are defined (in our own minds, at least) by the business we have built or the work we do. Think about the impact that losing that “work identity” is likely to have on your mental health.

My friend Gary, who has blown past “retirement age” and now spends most of his weekdays counseling younger CEOs, reports on his peers who have retired and are struggling. They have lost their sense of purpose and identity. Golf every day has gotten old, and they are watching too much cable news. They are at risk of rapidly becoming “angry old men.”

The good news is that there is an answer to Rob’s question, “Now what?” The answer begins with vision and planning. Successful business leaders know how to envision the future and develop a strategic plan.  Why not be as intentional in your planning for the next phase as you have been in building a successful business? Rob is an excellent guide through that thought process. If that isn’t enough to pique your interest, Rob includes a joke at the end of each chapter that is worth the read in its own right.

My next post will be an interview with Rob that touches on a few of the lessons from So You Think You Want to Retire – Now What? Stay tuned.