I had a conversation with my financial advisor recently. We talked about individual stocks and investments. Once I was dissuaded from going heavy into crypto, AI, and short-dated call options, I brought up a recent Barron’s article on real estate investment trusts or REITs. My advisor reminded me that while I didn’t have a ton of REIT exposure in my investment portfolio, my largest asset was already in real estate: my home.

I bring this up not to give you Dave Ramsey style personal finance advice column, but rather as a cue to think about your family’s complete balance sheet. If you’re reading this blog, a big part of your complete balance sheet likely includes your family business. But what about the rest of the story? Thinking holistically about your family’s complete balance sheet, not just the operating business, is a good mindset for fostering longevity, family harmony, and shareholder engagement.

What’s a Complete Family Balance Sheet?

Your complete family balance sheet considers not just the business, but the individual family shareholders and outside investments as well. Jennifer Pendergast had a great article in Harvard Business Review about creating an enterprise strategy for your family business. In that strategy, you need to consider your family’s ‘enterprise balance sheet’ or what I refer to as the family’s complete balance sheet.

Your family business may likely be one of your largest assets, but not the only asset.

The enterprise balance sheet represents the overall assets of the family, including your business as well as any real estate, equities, passive investments, or other assets. Your family business may likely be one of your largest assets but not the only one. A good exercise is to inventory everything that encompasses the complete family business balance sheets, whether at the operating company level, held individually, or collectively in another investment vehicle.

Your Complete Family Balance Sheet and Three Key Decisions

Family business directors generally focus on three key financial areas as it relates to their family businesses: dividend policy, capital allocation (investing), and capital structure (financing). An accurate picture of the complete family balance sheet will help inform the ultimate decisions made at the family business level that optimizes shareholder returns and maximizes total family wealth.

1. Dividend Policy

In our experience, the most consequential decisions that family business directors make relate to dividend policy. Does your family aim to maximize growth and serve as the economic engine for the family, or does your family business aim to provide financial independence through dividends?

A complete balance sheet view can help you and your family board make this decision more effectively. If, for example, the main operating business has historically paid most of its earnings out via dividends and other assets in the complete family balance sheet are also income producing, you may be able to pivot to growth at the operating business level. In contrast, distributions from other assets continue to supplement income. A complete balance sheet view allows you to look at your family’s ‘golden goose’ and see if you are truly optimizing the number of eggs you take from the nest.

2. Capital Allocation

Dividend policy decisions are not made in a vacuum. Cash paid to family shareholders as dividends cannot be reinvested to grow the business, while cash reinvested in the business for future growth cannot be distributed to family shareholders. Capital allocation decisions can come in the form of capital expenditure on existing divisions or the acquisition of new businesses or service lines.

A complete balance sheet view will allow you to think holistically about diversification and capital allocation decisions. Your family business may be considering investing in various forms of real estate, but the complete family business balance sheet reveals shareholders are well diversified into real estate individually. Does more real estate at the operating company make sense in terms of the complete picture, even if it makes sense for the company standing alone? A complete balance sheet view allows you and your family to make allocation and diversification decisions not just for the business, but for the family as a whole. 

3. Capital Structure

Family business directors are responsible for deciding how to finance the portfolio of assets that is the family business. Financial theory is one thing – many family business directors have more nuanced takes on debt that emerge from a worldview of fiscal responsibility or a deal that went south generations ago. The decision to finance the family business with debt, and with how much, is a discussion that can cut to the identity of a family and its business.

Your family’s feelings on capital structure may come to a different determination looking through the lens of the family’s complete balance sheet view. The company may have historically never been financed with debt, a decision and style of management made generations past. A complete balance sheet view shows that this mindset has trickled down to the individual shareholders, with very little debt across the complete balance sheet. Some leveraging of the balance sheet may seem aggressive, but in light of the complete balance sheet, the amount of debt for your family business may still be light and much less aggressive than it first appears. Having the complete picture will allow you and your family to make those decisions that match your shareholders’ return objectives and risk tolerances.

A Holistic Picture

Having a mindset that considers not just your family business balance sheet, but your complete balance sheet, will help you and your fellow family shareholders make better decisions that align with your shareholders. A holistic view will also help foster business longevity, health, and family harmony. Give one of our family business professionals a call today for help analyzing your family’s complete balance sheet.