Avoiding the Family Business Wealth Evaporation Trap

By: George A. Isaac, Family Business Consultant, Author & Speaker

Family business owners often inappropriately view the family business as their "operating entity" and all other assets as their "investments." They confuse business returns on equity with realized shareholder returns. Their "conservative" financial management often leads to irresponsible stewardship of a family's overall wealth resulting in families unnecessarily taking on unrecognized risks and experiencing lower investment returns and diminished liquidity. The consequence is inevitably the silent and unseen evaporation of family wealth - often over a single generation and the creation of problematic family dynamics from not meeting both business and individual family shareholder needs.

Recognize that the value of your family business is best described as an "unrealized stock gain". Value is not "realized" until cash is in the owner's pocket, which is often dependent upon a future liquidity event, such as the sale of the business. During this unrealized wealth creation phase, your family's business wealth is highly concentrated, illiquid and exposed to significant risks. Risks include volatility of future earnings, new competition, loss of key employees, customers, or suppliers, and uncontrollable market dynamics, such as interest rates, recessions, government regulations, and valuation multiples – each can impact the value of your business. In addition, family members that are in non-control ownership positions feel “trapped” in their family business which leads to owner dissatisfaction and problematic family dynamics. 

The solution is to objectively evaluate the many alternative strategies to release trapped family business wealth to meet both business and individual shareholder objectives and needs. There typically are short term and longer term implementation strategies available. When implemented carefully, the following benefits can be achieved:

■ Available capital to support the family business’ current and future needs

■ Improved risk-adjusted overall family wealth IRR's and family liquidity

■ Improved wealth diversification against unpredictable "tail" risks

■ Additional investments available to family members that may better meet individual needs

■ Tax efficient business wealth transfer to future generations

■ Increased family wealth asset protection

■ Improved family stakeholder satisfaction & family dynamics

QUESTION - How many Gen 3 and beyond family businesses see family member liquidity and investment diversification an issue as it relates to (a) your family's overall wealth management and (b) as it relates to family dynamics by providing or not providing individual shareholder liquidity?

Additional Isaac articles on family business matters available complimentary at www.GeorgeIsaac.com or contact author at gisaac@gaicapital.com