Key Takeaways
Cash and debt should be evaluated together because changes in liquidity, borrowing, and earnings collectively determine a family business’s financial flexibility and resilience.
Appropriate cash reserves and debt levels depend on company-specific factors such as working capital needs, cash flow stability, access to credit, scale, and the family’s tolerance for financial risk.
Establishing board-approved ranges for liquidity and leverage, supported by downside stress testing, can help directors make more deliberate capital allocation decisions when business conditions change.
The results of our 2026 Family Business Benchmarking Study suggest that this balance shifted during 2025. Median cash balances declined by 9%, and total interest-bearing debt declined by 4%. Yet median Debt/EBITDA increased from 0.45x to 0.58x as earnings softened. The companies owed less in absolute dollars, but they had less earnings capacity supporting that debt.
Those figures above provide a useful starting point for directors. How much liquidity does the business need? How much debt can it comfortably support? Most importantly, does the combination preserve sufficient flexibility to withstand adversity and pursue attractive opportunities?
1 - Cash and Debt are Two Sides of the Same Decision
A strong balance sheet gives a family business choices. Cash provides a buffer and allows the company to act when attractive opportunities arise. Debt can supply capital for investment without requiring additional shareholder contributions or consuming liquidity. The challenge for directors is determining how much of each is appropriate.
Cash and debt appear on opposite sides of the balance sheet, but directors should evaluate them together. A company may use excess cash to repay borrowings, reducing interest expense while also surrendering some liquidity. It may borrow to finance a capital project, increasing leverage while preserving cash for working capital or other needs. In either case, focusing on only one side of the ledger provides an incomplete picture.
The family businesses in our study held cash equal to 5.6% of sales at year-end 2025, while carrying median leverage of 0.58x EBITDA. Those figures describe the sample, but they do not prescribe the right balance for a particular company. A business with recurring revenue, modest working capital needs, and an available line of credit may be comfortable carrying less cash, while a more cyclical business dependent on a handful of large customers and volatile input costs may require a larger reserve.
Directors should assess whether the resulting combination of cash and debt improved or weakened the company’s capacity to respond when circumstances change.
2 - Start With the Jobs Cash Needs to Perform
Cash reserves are ultimately a risk-management tool. Cash funds working capital needs, scheduled debt service, unexpected operating disruptions, and opportunities that may need to be pursued before outside financing can be arranged. Because those needs differ, there is no universal cash reserve target for family businesses.
The size comparisons in the study illustrate the point. Companies with more than $100 million in total assets held median cash equal to 3.2% of sales, compared with 8.4% for companies below that threshold. The larger companies also carried more leverage: 1.18x EBITDA, compared with 0.26x for the smaller companies. Scale, access to lenders, cash flow predictability, and availability of collateral all influence the appropriate mix of cash and debt. The comparison does not tell smaller companies to accumulate more cash or larger companies to borrow more. It shows why the operating and financing characteristics of the business matter more than the overall median.
Directors can begin by identifying a minimum operating cash balance and then considering the additional reserve needed. How much liquidity would be consumed by a normal seasonal build in working capital? What happens if an important piece of equipment fails? Does the company have an unused line of credit, and would that availability remain in place during a downturn? A cash policy should be anchored to those demands rather than to a percentage observed in a benchmarking study.
3 - Debt Capacity and Debt Appetite Are Not the Same
The debt findings from the study demonstrate why leverage cannot be evaluated from the outstanding balance alone. The companies reduced interest-bearing debt by a median of 4%, yet Debt/EBITDA increased because earnings declined. A company can pay down debt and still become more leveraged if cash flow declines faster than the debt balance.
Debt capacity depends on the durability of cash flow, the timing of maturities, covenant requirements, and the cost of incremental borrowing. Debt appetite reflects something different: the degree of financial risk the family and board are willing to accept. A company may have the capacity to borrow and still choose a conservative capital structure because the business represents a substantial portion of the family’s wealth or because preserving control and resilience is a high priority.
For context, public companies in the study carried median leverage of 2.6x EBITDA, compared with 0.58x for the family business sample. This makes sense as public companies often have greater scale, more diversified cash flows, and broader access to capital. However, it also suggests that many family businesses operate with considerable borrowing headroom.
Debt can be an efficient source of capital when it supports an attractive investment, and the resulting obligations remain manageable. Prioritizing prompt repayment of debt is not always the best use of family capital. Unused borrowing capacity also has strategic value because it preserves the ability to borrow when an attractive opportunity or unexpected need arises.
4 - Establish a Range Rather than a Single Target
An effective liquidity and capital structure policy should define an acceptable range, with the lower boundary reflecting current cash needs to operate the business. The upper boundary should recognize that cash held beyond operating needs of the business has an opportunity cost. Likewise, a leverage range should preserve adequate covenant headroom and access to additional capital.
Family business directors should also understand what happens when results move outside the range. If EBITDA declines and leverage rises, will management defer capital projects, reduce distributions, or accelerate debt repayment? If cash accumulates beyond the identified need, will the excess be reinvested, used to repay debt, or returned to shareholders? Establishing those priorities in advance allows the company to respond deliberately instead of improvising under pressure.
A useful stress test is to evaluate cash and leverage under a downside case rather than relying only on the current year’s results. Directors should understand how a decline in revenue or margins would affect debt service, covenant compliance, and access to financing. They should also consider whether planned capital expenditures and shareholder distributions remain supportable in that scenario. The size of the cushion matters most when the business is tested.
Conclusion
The benchmarks in the 2026 Family Business Benchmarking Study are not prescriptive; family businesses need not hold cash equal to 5.6% of sales or target leverage of 0.58x EBITDA. Rather, benchmarking results help directors and managers orient important conversations around how other firms behave. Directors should evaluate benchmarking trends as helpful context for capital structure and allocation decisions that will influence the sustainability of the family business across generations.
Cash reserves, borrowing capacity, capital investment, and shareholder distributions are all connected. A board-approved range for liquidity and leverage can help guide management’s deployment of capital. It also gives directors and shareholders a clear explanation of why cash is being retained, why debt is being used or repaid, and how those choices support the company’s long-term objectives.