A family business can be most successful as a family enterprise when its owners recognize, honor and support each family member’s specific professional and economic objectives. There are four reasons why an individual may want to participate in a family business: cash flow, wealth accumulation, career/occupation and legacy.
By identifying and understanding each family member’s reasons for participating, owners can allocate the benefits and responsibilities of a business in a way that maximizes individual fulfillment and collective success. In addition, the flexibility of family business ownership and governance mechanisms—including trusts and other estate planning techniques—can allow each family member to participate in ways that are most consistent with his or her objectives.
Cash Flow
Participating in a family business as an owner or employee is one way to generate cash flow. Most marketable securities portfolios do not produce particularly high rates of income. In contrast, a family business can pay compensation or deferred compensation and other benefits to family members who work for the business. A family business can repay family loans with a variety of interest rates, and it can lease facilities or equipment from family members at reasonable lease terms.
Wealth Accumulation
Wealth accumulation, or appreciation on invested capital, is another reason to participate in a family business. A family member often can invest concentrated amounts of capital in the business with greater confidence in the potential for appreciation. Family business stock prices are not usually as susceptible to irrational market forces as publicly traded securities. Further, as a shareholder, director or executive, the business owner can have substantial influence on stock appreciation. Many studies find that family-controlled companies perform better over the long term than public companies because families are less likely to emphasize short-term profits at the expense of long-term success. Furthermore, coupling the business with a family office allows for even more efficiencies and long-term, family-focused planning and benefits.
Career/Occupation
Family members often benefit from occupational or career opportunities in the business that would not be available to them in a business that has no family connection. For example, a business that builds and manages hotels may provide its members with a wide range of occupational opportunities, including finance, marketing, design, hospitality, restaurant/club management and executive responsibilities. A family business also may be more willing to give its family member employees the time or flexibility they need to care for and raise their children.
Legacy
Legacy is a fourth reason why some family members choose to participate in the business. A family member who is proud of the business’ success and reputation in the community may wish to claim some share of that legacy as a family business leader, as a minority owner or through involvement in the family’s charitable foundation or family office. To create the best possible family business governance, ownership and succession plans, the business owners should seek to understand what each family member values the most. Then, they should consult advisors to design legal and economic structures that allow each family member to serve roles in the business that are consistent with his or her reasons for participating, and allow the family, as a whole, to best serve all objectives.
We are here for you—visit us today at reinhartlaw.com or call 800-553-6215 to learn more.
