My family and I have been out at the Broadmoor in Colorado Springs for a work conference. Since we were going to a nice resort and conference center, we decided to parlay the weekend into a family business meeting. The meaning of the family business impacts the three key legs of the family business stool: dividend policy, capital investment, and financing decisions. In this post, we detail how we thought about each of the three legs.
The intersection of family and business generates a unique set of questions for family business directors. We’ve culled through our years of experience working with family businesses of every shape and size to identify the questions that are most likely to trigger sleepless nights for directors. Excerpted from our recent book, The 12 Questions That Keep Family Business Directors Awake at Night, we address this week the question, “Should We Diversify?”
For public companies, today’s almost endless supply of cheap capital (as evidenced by the proliferation of special purpose acquisition companies, or SPACs) is a boon. The low cost of capital makes it easier to justify investment opportunities financially, and investors are willing to provide capital in search of higher returns. For many family businesses, however, the era of cheap capital may not be an unqualified good.
Two Developments That Will Affect Family Businesses
The rise of the family office as a source of investment capital for other businesses is the best evidence that families are comfortable looking outside the family business to generate returns on family capital. Just as liquid naturally flows to the lowest point, capital naturally flows to its highest and best use. The viscosity of family capital is high, so it may take longer to move, but it eventually will. In the context of this broader trend, we propose three things for family business directors to begin thinking about.
As recounted in the Harvard Business Review article entitled “What You Can Learn from Family Business,” an academic study of family-controlled and non-family public companies found that debt constituted 37% of the capital of family-run businesses, compared 47% for the non-family companies. This finding is generally consistent with our experience working with family businesses of all sizes. In this post, we consider why family-run businesses might be a bit more debt-shy than their non-family peers.
What’s the right capital structure for your family business? We find that the best answer to that question can be found after asking these four questions about the use of debt in your family business.
Part 2 | Finance Basics: Capital Structure
This post is the second 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 structure.
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.
Corporate Finance & Planning Insights for Multi-Generational Family Businesses
This is the inaugural post for our Family Business Director blog. By way of introduction, we thought we would anticipate a few questions that you might have.