Although family business owners often avoid the subject, money has a profound influence on the family. Its ability to create economic independence makes it a critical component of family enterprise success as well as a frequent source of conflict.
Well-drafted legal documents, sound long-term family and business planning, corporate governance and a strong culture embedded with values and purpose are essential ingredients for a successful family business. However, without an understanding of money's influence on the family and its decision-making, that success is compromised.
Money and control
It is an error to assume that family comes first in a family business. Often, the accumulation of wealth is the most important factor.
As the late Richard Wagner, a leading economic theorist and scholar, said: “Money is an all-powerful, persuasive and influential force within all aspects of the family business.” In many family businesses, whoever earns and/or controls the money dictates the fate of the family and the enterprise.
In family businesses, money is not a commodity. Rather, it's a defining element of the enterprise that pervades every decision, including succession planning. When the assets of the family business are indistinguishable from personal assets, owners are typically less willing to relinquish control or transfer ownership to the next generation. Without economic independence, owners do not have the resources to live independently of the business.
The separation of family enterprise assets from personal assets takes time, commitment and, potentially, a temporary sacrifice of personal asset accumulation for the sake of business growth. It also requires professionalism, rigorous investment and divestment criteria, written investment policy statements with defined performance criteria and cost monitoring. The investment process can be delegated to a non-family third party, but the investment structure and performance cannot be ignored by family members. One must understand why investments are being made in conjunction with the expected risk versus potential return.
Mastering practical money skills is essential, and it starts with education. Managing money is just as important a life skill as learning to communicate effectively or being able to read. Families need to understand how money operates and its importance to the family unit. A family should make investments, within the business or personally, only when their knowledge reaches an experience level at which they can perform effective due diligence on potential investment opportunities. This skill takes time, and the education should begin early as early as elementary school.
Money as a source of conflict
Conflict among shareholders in a family enterprise often stems from disagreements over financing expansion, reducing distributions or increasing employee pay. When these conflicts arise, each individual's perception of and/or need for money influences the outcome. For example, one shareholder may object to personally signing on to bank debt — even if the expansion is in the best interest of the company — because of fear of jeopardizing personal financial security.
Disagreements over dividend reductions, particularly when they involve non-working shareholders who don't understand the internal operations of the business, are frequently rooted in money's ability to alter lifestyles and the shareholder's sense of self-worth. The vote for quick, short-term gains is usually based on the desire to fund personal wants that have nothing to do with the long-term viability of the business. The failure of the family members to understand the purpose of money and how money influences the family enterprise, both positively or negatively, will create conflict.
Money's influence on the family enterprise is more than internal rates of return, asset allocation models or corporate debt service coverage ratios embedded within bank loans. In a family enterprise, money's influence is associated with concepts that go back through the ages. Aesop's fable “The Goose That Laid the Golden Egg” and the tale of King Midas in Greek mythology convey moral allegories about the individual's relationship with money, warning against greed. And greed is the incubator of family conflict around money.
Greed, entitlement and shortsightedness
When they sell their businesses, families often fail to heed the lesson of Aesop's fable about the goose who laid the golden egg. When that happens, shareholders seeking immediate gratification, riches and the good life typically end up finding something much different. According to the National Endowment for Financial Education, 70% of people who suddenly come into money end up broke within a few years. All too frequently, the family that sells a sustainable business learns painfully that sudden wealth is not as secure, enjoyable or predictable as the steadier stream of income the business generated.
The moral of the King Midas tale is that one should not be greedy and should instead appreciate what one already has, no matter how large or small. But this idea conflicts with the popular conception of the “American Dream” as getting everything you want.
We see this desire for more material goods and subsequent greed in families fighting over small percentage differences in distributions and ownership. The desire for more money can tear away the fabric of the business and the family unit. Many shareholders simply focus on the rewards and benefits money offers without understanding the discipline, time and knowledge required to make business decisions to sustain profitability.
Transparency is the key to profitability. It's prudent to adopt a family values and mission statement, augmented by annual family meetings where an understanding of profit and loss statements, family governance and legal documents are communicated and discussed openly.
The three-circle model of the family business system, developed in the 1970s by Harvard Business School professors John Davis and Renato Tagiuri, has proved to be an effective interpretation to the unique family enterprise structure. The model has assisted business owners in understanding the unique and overlapping structure embedded within a family enterprise. What it does not communicate is the inescapable influence of money on the merger of the three systems: ownership, family and business.
Being a good steward of the enterprise and having sound governance with perfectly drafted legal documents is not enough to be successful. Clarity around how your company's shareholders view money is key to making sound decisions that benefit both the business and the family.