Everybody knows that ‘family’ changes business. Emotions, legacy, and last Christmas aside, business finance is also a major difference between family businesses and their counterparts. Shareholder liquidity, family control, and capital for growth are the three main demands of family business cash flow. A balance or ‘equilibrium’ of these demands is crucial to families and their businesses.
All companies need cash flow to operate and grow the business. This is not a special trait for family businesses. However, the tug-of-war on this cash by the other cash flow demands in a family business is what sets family businesses apart.
Shareholder liquidity becomes a cash flow demand pulling on the family and cash flow equilibrium in family businesses, whereas that is not the case with publicly-traded or other widely-held companies. In those companies, shareholders can sell as needed to tap into their needed cash. In the family business, a shareholder who wants to sell their stock/interest can dramatically effect the business’ ability to meet capital requirements to operate or expand the business.
It is normally the desire of the family members to keep control “in the family.” Therefore, usually ideas of bringing in outside investors to solve this problem is dismissed immediately. The introduction of outside capital, diluting family shares, can impact the ownership control of the business.
To keep the equilibrium in balance, all shareholders must possess ‘Like-minded Leadership’ to take the necessary risks to build the business for the future. Without the cohesiveness of the shareholders, the family business will fail to execute vital strategies which in turn will stunt growth and potentially dig into the wealth of shareholders.
Another way to navigate the tough waters of cash flow decisions is by implementing a shareholder liquidity program. A program in which shareholders can somewhat rely on cash flow from their investment can do wonders to take the pressure off of the shareholders liquidity demands. Ad hoc or sporadic distributions make for uneasy shareholders which in turn may pull the cash flow equilibrium completely out of balance.
