The importance of creating wealth outside of your family Business

If the bulk of a family’s wealth is tied up in a family business, major complications can occur when it comes to providing an inheritance for the family members who are not involved in the business.

In this case, the family will need to consider the accumulation of non-business assets. This will help to provide a source of income for the retired parents of the business while avoiding the need to sell the business to the remaining family members and providing a pool of assets to be given to family members who are not in operation of the business.

Family conflict issues can arise from the sharing of family business revenue between operators and non-operators.

Operators might feel that it is somewhat unfair that they are expected to manage, develop and grow wealth in the business when they consider the benefits of their hard work are being shared with members of the family who do not help with it’s operation.

Even if the parents give the operators an option to buy out the non-operators, the funding of such a buyout (whether requiring bank finance or through some vendor finance provided by the ‘vendor’ siblings at the parents’ direction) can again result in financial hardship for the business and angst for both lender and borrower.

While the non-operators will most likely want to see a dividend stream, the operators may want to retain funds in the business for capital expenditure, working capital and debt reduction.

The non-operators may also put pressure on the operators to buy them out if, as is common, the cash returns on their investments are low; and if a buyout by the operators is not possible, then there may be pressure from the non-operators to sell the business, in which case the operators may lose their livelihood and the business they have worked for many years to develop.

What these complications demonstrate is that rather than face these issues down the track, it is important to accumulate wealth outside of the business so that operators and non-operators don’t need to co-exist in the business into the next generation.

When a family business does include operators and non-operators, it is important that the operators are rewarded for any sacrifice they may have made for the family business. It is common for the next generation of operators to have had a role in managing the business for many years, at less than market salaries, while working extended hours and passing up other possible jobs and career opportunities to stay loyal to the family business on the understanding that they will be recompensed on their parents’ retirement or through their parents’ wills.

As for the non-operators, it is important for the benefit of healthy family relationships that their inheritance is also satisfied but preferably through non-business assets.

Executing these actions to be sure that upon retirement all family members are satisfied with their respective inheritance, is a process that is gradual and should be implemented over a number of years. It is never too early to start planning the succession of your family business. It is also important that as a parent you encourage full communication and engagement with the next generation so that when it comes to your retirement or death there are no surprises.