There is a silent emptiness in the hearts of
many successful owners of family-run businesses. They have learned how to make a
successful financial living, but not a thriving financial life. Surprisingly,
few family business owners have crafted a dynamic long-term capital plan to
integrate the enterprise needs of a CEO with the personal needs of the owner of
a family business. As a result, the capital at their disposal is underperforming
because of lack of focus, integration and strategic intent.
 But the capital engine for the family-owned business can be
optimized if the business owner integrates, in a strategic manner, the four
primary financial capital modules: human, enterprise, personal endowment and
preservation. Human capital (investments in people) and enterprise capital
(investments in financial assets) are in the business domain. Personal
endowment capital (investments for the family’s lifetime) and preservation
capital (capital directed for future generations and social capital) are in the
personal domain.
When the four capital modules are managed as four independent
stovepipes, it is nearly impossible to achieve peak performance. As capital is
redeployed and reinvested from module to module, loss of value often occurs
because of taxes, capital inflexibility or capital risk. These traps are
especially intense for families who are business-rich and cash-poor because
every loss of value can worsen their situation.
Traps that often ensnare business owners
include:
• Unnecessary dilution of
the owner’s equity. We often see owners who give away equity to key employees
when simulated equity at a much lower cost would have achieved the same result
in talent recruiting and retention.
• Overexposure to estate
taxes and personal income taxes at all levels. Many business-rich but cash-poor
owners with limited personal assets outside of the business see little need for
estate planning—and thus forgo opportunities to transfer significant business
value to their family at very reduced values over time.
• Waiting until a major liquidity event occurs
to reposition business assets to personal
assets. Business owners often miss highly attractive opportunities to
reposition business assets to personal assets inside the confines of the
business without tax or other frictions. ERISA-based plans or supplementary
executive retirement plans are examples.
• Lack of coordination between personal financial planning and enterprise planning,
including issues such as charity, investments, taxes, cost of capital and
personal endowment planning.
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