Family Business Director

Corporate Finance & Planning Insights for Multi-Generational Family Businesses

Category

Capital Budgeting


Planning & Strategy Special Topics

Review of Key Economic Indicators for Family Businesses

This week we look at recent economic data and the implications of this data regarding the Fed’s upcoming monetary policy actions.  GDP growth in the U.S. economy slowed to 1.6% in the first quarter of 2024, lagging measures of 4.9% and 3.4% recorded in the final two quarters of 2023.  Leading economic indicators point to a further slowdown on the horizon in 2024, as The Conference Board’s Leading Economic Index, fell 2.2% in the six months ended March 2024.  We take a brief look at these trends and more. 

Planning & Strategy Taxes

The Case for Research and Development

A Case Study of Innovation and Taxes

Consistent investment in research and development is at the heart of many family business breakthroughs. Like any investment, R&D spending consumes family capital today in the expectation of generating more cash flow in the future, and for many years, companies deducted R&D costs from taxable income as those dollars were spent. However, a little-heralded provision of the Tax Cut & Jobs Act of 2017 upended the status quo for tax treatment of R&D expenditures. Taxpayers are now required to capitalize R&D costs, deducting them from taxable income over a period of five years rather than in the period the costs were incurred. With this in mind, we present a brief case study to help family businesses visualize this change and better prepare for capital budgeting decisions in the future.

Planning & Strategy

Your Family Business Is on the Clock – Are You Ready?

The 2024 NFL Draft occurred this past weekend, and while a family business director might not be sitting 8th on the clock in next year’s NFL Draft, there are certainly draft day themes that can be applied within your family business. NFL Draft “assets” may look different than those of the family business, but the themes of considering shareholder & owner preferences, allocating capital, and preparing for next-generation leadership mirror many of the responsibilities of a family business director. Read more in this week’s post.

Planning & Strategy Taxes

Capital Planning and IRS Section 6166

Successful enterprising families are careful and deliberate consumers of family capital. In specific circumstances, Section 6166 of the Internal Revenue Code can provide a capital planning alternative family business directors should consider when facing large contingent liabilities for shareholder estate tax obligations.

Capital Structure Planning & Strategy Shareholder Engagement

Navigating the Buffet of Investment Options

A Guide for Family Businesses

This week’s blog centers around the challenges of asset allocation and investment decisions for family businesses, touching upon the importance of understanding a family’s appetite for risk and growth. We explore how the meaning assigned to the family business influences investment choices options and the necessity of balancing risk and expected returns. While there may not be a perfect answer for deciding how to invest, reevaluating what your family business needs and what it means to you will help you decide more wisely.

Capital Budgeting in 5 Minutes

New Video Released on Family Business On Demand Resource Center

Capital budgeting can’t be avoided — the only question is whether your family business has a consistent and disciplined process for evaluating potential investments or instead makes significant capital commitments in a more haphazard way. In this video, we describe the key elements of the capital budgeting cycle and identify some common potholes along the way.

Capital Structure Dividend Policy

Managing Your Complete Family Business Balance Sheet

Your family business may likely be one of your largest assets, but not the only asset. Thinking holistically about your family’s complete balance sheet, not just the operating of the business, is a good mindset for fostering longevity, family harmony, and shareholder engagement.

In this post, we discuss three key financial areas that family businesses generally focus on. Having an accurate picture of the complete family balance sheet will help inform the ultimate decisions made at the family business level that optimize shareholder returns and maximize total family wealth.

Planning & Strategy Shareholder Engagement

Lessons from the Oracle of Omaha

Warren Buffett is regarded as one of the world’s preeminent investors and most shrewd businessmen. Buffett and his partner, Charlie Munger recently drew thousands to Berkshire Hathaway’s annual meeting in Omaha. Buffett’s 2022 shareholder letter analyzes the company’s strategy, performance, and vision for the company going forward. This year’s letter provides several lessons for investors and family businesses alike. 

Planning & Strategy

Storms Ahead? Best Practices for Forecasting Performance

How do you approach your family business budget? Do you ask your managers to “reach” or to create targets you expect to meet? Do you measure your forecasting accuracy? What is your process? In our post this week we share three forecast reminders that may help you make better budgets: Measure yourself regularly, remember the law of averages, and adapt your roadmaps when needed.

Three Questions to Consider Before Undertaking a Capital Project

Capital budgeting tools are ideal for answering the question: Is the proposed capital project financially feasible?  Too often, however, we see these tools being used to answer what seems to be a related question, but one that the tools are simply not designed to answer: Should we undertake the proposed capital project?  The first question opens the door to the second, but the tools of capital budgeting – no matter how sophisticated or quantitatively precise – cannot answer the second.  To answer the second question, family business directors need to consider three qualitative questions identified in this post.

Deciding What to Decide

Capital Allocation in Family Businesses

How are you and your fellow directors deciding what to decide? Is there consensus around the economic meaning of your family business to your family? Gaining consensus around the meaning of your family business can be a crucial first step to making all the strategic finance decisions you make line up with one another.

Leftover Candy and Lazy Capital

Despite our best efforts, having four kids in the house means that we are a net candy importer over the Halloween weekend. Staring at the piles of candy in our house this morning brought to mind several recent conversations we’ve had with clients and prospects. The topic of those conversations was “lazy” capital. In this post we discuss where lazy capital comes from, what its consequences are, and how to get rid of it.

Planning & Strategy Special Topics

Five Economic Indicators for Family Businesses

Family business directors generally take the long view relative to their publicly traded counterparts, providing a reprieve to constant market updates and daily market volatility.  Successful family businesses plan for the next generation, not just the next quarter. However, family businesses cannot simply put their heads down and ignore economic trends outside their family’s industry.

What Time Is it for Your Family Business?

It is harvest time in rural America.  Farmers are working long hours gathering the crops that have been planted, fertilized, watered and worried over since springtime.  While the cycle of planting and harvesting is an annual one on the farm, for family businesses, the cycle can span decades or even generations. There are many different ways to classify family businesses, but one simple distinction that we find ourselves coming back to often is that between planters and harvesters. So what time is it for your family business?  Is it planting season or harvesting season? 

Family Businesses and Scarce Capital

Family Business Director was recently whiling away the hours scrolling through the archives of the Harvard Business Review when an article caught our eye.  “What You Can Learn from Family Business” was written by Nicolas Kachaner, George Stalk, Jr. and Alain Bloch, and appeared in the November 2012 issue.  The authors describe an empirical study they undertook to discern the ways family businesses are different from their non-family owned peers. In a series of posts over the next several weeks, we’ll take a closer look at some of the attributes identified by the authors, particularly from the perspective of privately-held family businesses.  This week, we’ll consider how family businesses make capital expenditure decisions.

Build or Buy?

Is Your Family Business a Builder or a Buyer?

How should you and your fellow family business directors decide whether to build or buy? What will be the most effective form of capital investment for your family business? Since software developers think more about the build vs. buy decision than most of us do, we thought it would be interesting to apply a software-related decision framework to family business investment decisions. For purposes of this blog post, we follow the six step decision framework advocated by Justin Baker.

What Time is it for Your Family Business?

It is harvest time in rural America.  Farmers are working long hours gathering the crops that have been planted, fertilized, watered and worried over since springtime.  While the cycle of planting and harvesting is an annual one on the farm, for family businesses, the cycle can span decades or even generations. There are many different ways to classify family businesses, but one simple distinction that we find ourselves coming back to often is that between planters and harvesters. So what time is it for your family business?  Is it planting season or harvesting season? 

FAQ: How Should Financing Affect Capital Budgeting Decisions?

Family business directors must properly distinguish between capital structure and capital budgeting decisions to make the best decisions.  In this week’s post, we answer a frequently asked question that leads us into a discussion of what is known as the “separation principle.”  In short, what are the relevant cash flows for capital budgeting analysis?  And, when is it appropriate to combine investing and financing decisions?  If you have ever struggled with these questions, this week’s post has the answers you need.

A Guide to Corporate Finance Fundamentals

Part 3 | Finance Basics: Capital Budgeting

This post is the third of four installments from our Corporate Finance in 30 Minutes whitepaper. In this series of posts, we walk through the three key decisions of capital structure, capital budgeting, and dividend policy to assist family business directors and shareholders without a finance background to make relevant and meaningful contributions to the most consequential financial decisions all companies must make. This week, we focus on capital budgeting.

Three Questions to Consider Before Undertaking a Capital Project

Capital budgeting tools are ideal for answering the question: Is the proposed capital project financially feasible?  Too often, however, we see these tools being used to answer what seems to be a related question, but one that the tools are simply not designed to answer: Should we undertake the proposed capital project?  The first question opens the door to the second, but the tools of capital budgeting – no matter how sophisticated or quantitatively precise – cannot answer the second.  To answer the second question, family business directors need to consider three qualitative questions identified in this post.

Five Reasons Your Financial Projections Are Wrong

The good news – or maybe it’s the bad news, depending on your perspective – is that overly optimistic projections are not necessarily the result of intentional errors on the part of your family business managers.  Rather, behavioral economists tell us that humans are prone to overconfidence as a result of what they refer to as cognitive biases. In this post, we address five cognitive biases contributing to overly optimistic forecasts.

Is Your Family’s Capital “Lazy?”

What We’ve Been Reading

At a recent meeting with longstanding family business clients, management mentioned that one of their independent directors had introduced the term “lazy capital” into the family’s vocabulary.  We had never heard that term before, but it perfectly encapsulates something we see at too many family businesses: an undisciplined capital allocation process that tolerates sustained underperformance.  We ran across a couple articles this week that, while written with public companies in mind, made us think about the perils of “lazy” family capital.

Determining the Right Hurdle Rate

How Good is Good Enough?

If family business directors are going to make good capital allocation decisions, they need to know what the right hurdle rate is.  If the hurdle rate is set too low, the family may experience weak future returns.  Setting the hurdle rate too high, however, introduces the risk that the family business will pass on attractive investment opportunities.  In this post, we consider how the hurdle rate relates to the weighted average cost of capital.

Capital Structure Dividend Policy M&A Performance Measurement Shareholder Engagement Taxes

What Keeps Family Business Directors Awake at Night?

Stewarding a multi-generation family business is a privilege that comes with certain responsibilities, and each family business faces a unique set of challenges at any given time.  For some, shareholder engagement is not currently an issue, but establishing a workable management accountability program is.  For others, dividend policy is easy, while next gen development weighs heavily. Through our family business advisory services practice, we work with successful families facing issues like these every day.

Consulting Services

Family Business Advisory Services

Mercer Capital provides financial education services and other strategic financial consulting to family businesses