Family Business Dividends in Turbulent Times

How can family businesses make the tough decision whether to reduce or suspend dividends to family owners during an economic crisis? Flexible informed dividend policies are the answer.

The future is here, and it is turbulent. Disruptions of many sorts are upending industries, companies, and investment portfolios. The reality is that crises will recur, sometimes with little notice, and can come from any number of economic, environmental, technological, or socio-political sources….or a combination. They can create cashflow shortages and financial distress for a family enterprise that may lead to overhead/investment cuts and pressure to reduce dividends to remain afloat. At the same time, family members who rely on dividends may need to suffer the consequences. Should cuts to dividends be an option for family enterprises in times of economic instability?

During times of economic turbulence, the pressure to reduce or suspend dividends to family business owners can become intense. Even though some family members may be highly, if not solely, dependent on dividends for their income or for planned investment capital, the reallocation of dividend payments may be necessary for the short-term solvency or the long-term survival of the family business. Tough decisions are required.

The guiding principles for navigating these difficult competing needs in a family enterprise include:

1. A flexible dividend policy
2. Which is understood and embraced by family owners
3. Advance anticipation and preparation of asset reserves by family owners and through the company’s financial management
4. Timely, meaningful, dividend analysis provided to the family
5. Regular dialogue between the owners, board, and management.

Business Reinvestment or Owner Dividends?
Even in the best of times, the owners of a family business must make strategic decisions about the allocation of net profits from their company between two purposes: business sustainability and family economic needs and wishes.

On the business side, profits can be directed to important uses that bolster the company’s operational strength and position it for future growth. Reinvesting according to the strategic plan and business plan, building a reserve cushion of cash, improving technology and production efficiencies, and investing in new opportunities and acquisitions are among the typical demands.
On the family side, profits not kept inside the business become dividends. Family business dividends often are seen as a vehicle for funding the lifestyles of the owners, whether for essentials like housing, support for the needs of their children, or discretionary expenditures on enjoyable things.

What is less visible, and often overlooked, is that dividends also support a broad array of activities that help a business-owning family remain united, engaged, and stable as a long-term ownership group over generations. These include:
• Joint family investments outside of the main operating company (e.g., direct investments, private equity, venture capital, new ventures, or more liquid assets)
• Funding new entrepreneurial ventures led by family members
• Governance activities (e.g., a Family Council, Owners Council) to retain unity, alignment, engagement, and effective collaborative decision-making
• Education and development of the next generation (e.g., preparing them to be capable owners and board members)
• A collective family fund to purchase shares from family members who want to, or need to, be bought out
• Family philanthropy and other social impact activities
• Family assets that help to unite the family (e.g., a family home for shared gatherings)

What is a Dividend? Who Decides the Dividend Policy?
It is important to define a dividend: the payment to the owners from the cash profit of a corporation, whether publicly traded or privately held. (Of note, cash payments may be called distributions rather than dividends when they come from some other legal form of ownership, such as a limited liability company or interest in a partnership.)

A dividend is issued if a company decides to issue it.

A dividend policy is a formal statement declaring the company’s and owner’s point of view about how dividends will be calculated, when they will be paid, to which owners (holding which types of shares), and how dividends will be handled in turbulent periods.

A company’s dividend policy is proposed by the board and approved by the owners.

Dividends are recorded on the company’s financial statements.

Even with a dividend policy in place, there is a recurring annual need for a company to determine, specifically, how it will allocate available profits each year between multiple internal company needs and distributing profits to the owners. During periods of severe economic instability, there is a need to determine this more frequently, such as on a quarterly or monthly basis for a period of time.

Competing Claims on Profits: Dividend Considerations in an Economic Downturn

During an economic crisis, when a family company’s profitability may be in question, how to resolve the company’s dividends is an essential and extremely delicate concern. Should the company reduce the percentage of profit paid out as dividends? More restrictively, should the company delay any dividend payments, or even suspend them entirely, to preserve liquidity for solvency and operational necessities? The two competing claims on profits – business or family – can become particularly charged.

Family owners need to be educated about the consequences of choosing different priorities, so they are an informed ownership group with the right expectations.

In this type of environment, the company may suffer from serious revenue and cash flow problems. During the global COVID-19 pandemic in the early 2020s, for example, real estate firms had tenants who could not afford to pay rent, manufacturers oversaw silent factories, and banks had to contend with a growing list of clients defaulting on their loans. As corporate budgets become squeezed, dividends can be perceived as a luxury. Any available profits and cash reserves, arguably, should be used to prioritize the company and sustain essential business infrastructure.

Even if a company is managing through an economic downturn relatively unscathed, savvy owners recognize that the future is uncertain. The board and owners may consider it prudent to build financial reserves in case the downturn lasts longer than expected or recurs. They may reallocate funds previously earmarked for a dividend payment to shore up cash or safe liquid investments for more turbulent times ahead.

Meanwhile, family owners likely will continue to need dividends for their personal lives. Family members who rely on dividends for their lifestyle could have difficulty finding other sources of income quickly should dividends be cut and may not be able to abruptly reduce their personal expenses. Even family members who do not usually rely on dividends heavily (i.e., who have other sources of income) may urgently require dividend income to supplement dwindling primary income sources. After all, jobs disappear, client lists shrink, investments drop in value, tariffs rise and fall, political instability grows, and so on. Dividend payments may further shift from a secondary source of income to something on which more family members greatly rely.

Between these two claims on profits – business or family – how can family enterprises reconcile these competing responsibilities and handle dividends during a downturn?

Two Main Choices for Dividends During a Downturn

As family companies consider their response to an economic downturn, they have two basic choices, each with variations:

1. Continue to issue dividends and, if so, at what level, or
2. Suspend dividends and, if so, for how long.

The decision and its variations depend on a company’s situation, a family’s situation, and how conditions change as time passes – all requiring “real time” adjustments.

Dividend Continuation
Family companies that decide to continue to pay dividends during an economic crisis have multiple options for dividend levels:

1) Continue dividends, either at the current rate or an increased rate:

Companies that maintain or increase their dividend do so because the economic crisis has led to increased demand for their products or services and increased net profits. From the owners’ perspective, the continuation of dividends at an unchanged or increased level during a crisis is ostensibly favorable.

During economic downturns, family companies can recommend that family owners donate some of their dividend payout to those in need. The Family Council, Owners Council, or philanthropic foundation of the company or family can coordinate giving strategies and communication plans.

However, economic crises can be fast-changing. If the company experiences business declines, owners’ dividends still could suffer. The owners should be prepared for change, even if, for a time, the dividend remains intact.

Boards should be completely transparent with family owners regarding the frequency of reviewing new information affecting changes to the dividend, and that the dividend could be reduced at any point. This type of clear timely communication with owners is recommended in order to set realistic expectations, avoid surprises, and to help family owners plan ahead.

2) Reduce dividends, either minimally or substantially:

Reducing dividends by even a minor level can, for some companies, amount to significant cash savings for the company per quarter. Each company needs to determine how much cash savings is needed to cover subsequent quarters’ challenges, and to calculate the amount of dividend reduction that is required.

Dividend reductions are not the only source of liquidity for a company, of course, and should be considered alongside other options. Clear communication to the owners about what other sources were considered, and why a dividend reduction is needed, is important.

The decision to continue the dividend can be temporary, decided on a quarter-by-quarter basis as the crisis unfolds and conditions change, either externally or internally.

Dividend Suspension Examples
We examined the dividend levels of fifteen publicly listed, family companies during the first 14 months of the COVID-19 crisis, from March 2020 through May 2021. While we found a range of approaches, the majority of family companies that we examined (60%) entirely suspended the payment of dividends early in the crisis. One of these companies, Molson Coors, explained in late May 2020 that they suspended the dividend to “preserve capital during the pandemic and protect and bolster its liquidity position due to global economic uncertainty.”(1)

Fourteen months later, 46% of the original companies still had not reinstated dividend payments. A common factor: these companies represent some of the industries hardest hit by the COVID-19 recession.

Of the family companies that suspended dividend payments and then made adjustments, one (The Gap) suspended payments in January 2020 and then declared them postponed in March, to be reinstated at the original level in 2021. They followed through on that promise during the first quarter of fiscal year 2021 but then halved dividends for the second quarter. A second company (Estée Lauder) suspended payments in June 2020 but reinstated them in September and, in December, increased dividends by 10.4%.

Several factors likely influenced our surveyed companies’ dividend strategies, including:

• varying levels of economic distress, depending on their industry or region
• the level of diversification in the company, holding company, and/or corporate portfolio
• their sensitivity to the fact that dissatisfied public investors could simply take their capital elsewher
• in some countries, government support measures for businesses prohibited the payment of dividends
• the level of outside liquidity and investments family members had to rely on, apart from dividends (whether independently or pooled, and whether in a family office or elsewhere)

There is No Single Formula, but Being Prepared is the Key

There is no single right answer in an economic crisis, it seems. But arguably, preparedness or lack thereof, has been a main—and controllable—factor for companies trying to survive during economic crises, whether COVID-19’s long and bumpy ride, or the prior crisis, the 2008 global financial crisis.

Many publicly traded companies faced financial hardship during the COVID-19 recession in part (or entirely) because they used too much of their available cash to reward owners and buy back shares to boost their stock price in prior years. As The New York Times reported in late April 2020, in the three years through 2019, “companies in the S&P 500 stock index spent $2 trillion on buybacks, 30 percent more than what they spent over the previous three years.” (2) These same companies had a much smaller cash buffer available during COVID-19 and found themselves seeking government support.

On a brighter note, consider the case of a Canadian family involved in real estate development and hospitality during the economic downturn of 2008. Bank financing, which most real estate developers heavily rely on to finance projects, effectively evaporated. The Canadian family business, however, had been expecting a downturn; it didn’t know exactly when it would occur. To prepare, it set aside cash reserves during many profitable years instead of distributing larger dividends to the family owners. Rather than needing to borrow in difficult times, like many of their competitors, the company had enough cash on hand in 2008 to meet its obligations, to maintain the modest dividend level that was their usual target, and even to make new acquisitions at favorable prices during the lower points of the economic downturn.

Three Lessons Learned
During an economic crisis, each family business must make this dividend decision uniquely, and often more than once, based on the multitude of factors at play in their family enterprise system and how they evolve over time. But there are some actions that family companies can proactively take to be ready for the tough decisions about dividends, mainly:

1. Bring flexibility to your dividend policy
2. Plan ahead for the next downturn by building reserves
3. Engage in meaningful regular dialogue between the owners, board, and management

1. Bring Flexibility to Your Dividend Policy
Family business owners, who often think of their dividend policies as static and leave them unchanged for years, need to consider a dividend policy with the flexibility to address changing business and family needs during periods of economic instability. To manage family members’ expectations and to avoid surprising the owners, the board can advise the owners that a more flexible dividend policy may need to be instated, which means a possible reduction or suspension of dividends during tough times. Spending time detailing what this looks like, in advance before a crisis arrives, is time well spent by the board and owners.

Family owners too should consider how they can be adaptive to changing economic conditions personally, in order to accommodate a flexible dividend policy. Family members may want to consider in advance how they would adjust their lifestyles to match a level of dividends the company can afford in a downturn. The family may encourage family members to foster financial independence beyond dividend reliance, as well as create a personal “downturn fund” to ensure they have the resources to continue to meet their lifestyle needs during a crisis.

2. Plan Ahead for the Next Downturn
Waiting for a crisis (or a second or a third one) is not necessary or desirable, and places both the business and family members at risk. Longer-term planning, grounded in guiding principles for each side of the “competing claims” equation (business and family), is important.

These principles may include:
On the business side, a pool of cash or liquid investments (cash equivalents) that can be sold quickly must be preserved to help the company weather downturns, make acquisitions when prices are depressed, provide a minimal level of dividend payments, or buyout owners who need liquidity.

On the family side, as described above, this involves financial preparation by family members: encouraging less dependence on dividends by family members; adjusting individual lifestyles to match a level of dividends that the company can afford not just in difficult times, but in good times as well; and creating a personal downturn reserve for family members. In addition, have a buy-sell agreement in place (as part of a broader shareholder agreement), so that family members who need liquidity know the process, valuation, and steps that will be taken to sell their shares.

3. Engage in Meaningful Regular Dialogue between the Owners, Board, and Management
Determining the right approach for a specific family business in times of crisis requires a detailed, frequent, and transparent dialogue between the owners and the board of directors. The board is the mediator between the perspective of the owners and the needs of the business. Management participates in these discussions as appropriate.

The board must understand the needs of the owners, their options, and the potential repercussions for the owners’ lives if dividends were to be eliminated or greatly reduced. In turn, the owners need to understand the company’s requirements for cash, the downstream operating effects of different decisions around dividend payments, and the opportunities available to the business during a downturn (such as a good price on an acquisition).

These conversations should occur at regular intervals and involve some education about options as well as discussion of analysis, pros/cons, decision drivers, decision processes, and communication plans. (Meetings of the owners should also occur regularly, without the board, so the owners can align and speak with one voice to the board.)

The conversations between the owners and board should address fundamental questions, including:

1. What does the company need in order to survive, given that its survival is the basis of the family’s future wealth and dividend income?
2.  Can other sources of capital—beyond the cash to be used for dividends—suffice at this time for business continuity? These could include deferred investments or capital loans from third parties.
3. Are there other sources of cash for family owners—loans on their other assets or from other family members, or perhaps the sale of personal property—that could support them through this period?
4. What are the economic consequences to the family owners if dividends and distributions are reduced, postponed, or eliminated?

 

Conclusion
The short answer to the dividend question, therefore, is “be flexible, be informed, and be forewarned.” Family business owners need to internalize the inevitability of downturns and disruptions and ensure that their policies and practices a) help build up personal and company reserves in advance; and b) provide the flexibility needed both to address challenges and to seize opportunities. During an economic crisis, these tough decisions need to be made collaboratively between the owners and board, with the twin goals of an enduring enterprise and family stability.

 

 

1. Lawrence C. Strauss. Molson Coors Suspends Its Dividend for 2020. Barron’s, 26 May 2020. Accessed April 15, 2025.
2. Flitter, Emily and Eavis, Peter. “Some Companies Seeking Bailouts Had Piles of Cash, Then Spent It.” The New York Times, 24 April 2020. Accessed April 15, 2025.