That’s a Shareholder Problem!

2Posting by Eric Fletcher, CPA

For most large businesses, the personal financial needs of their shareholders, partners or members are of little concern.  Obviously, there is a market incentive to maximize the value of the company, thus enriching the owners, but the impact that the income or appreciation of the company has on the shareholders does not have to be a principal concern of management.  The exact opposite is true for the family business, where the finances of the company and its owners are almost inextricably bound.

For the small enterprise where ownership is concentrated in a tight circle of family members, the challenge of balancing the needs of the business and its owners is somewhat easier in that there are typically less barriers to communication between the owners and management.  In fact, they are oftentimes the same individuals.

For larger, more mature organizations or companies where ownership has become more dispersed to include non-active owners and professional management, it is probable that management has a very limited understanding of the financial needs of the owners or of their ability to satisfy these needs from sources outside of the company.  Owners are likely reluctant to share too much of their personal situation with “outsiders.”

Regardless of the size of the family business, there are going to be instances where the owners are likely going to look to the company to provide cash flow.  These instances may be directly related to ownership of the company, such as distributions to cover income taxes generated by pass-through income or to help provide liquidity in the event of an estate tax liability upon the death of the owner.  The cash needs of the owners may also be related to more personal matters such as costs of education or retirement, purchase of real estate or other investments.  No matter what the reason, these needs can become a strategic problem for the business and should be viewed as such in the long-term planning of the company.

As much as possible, the needs of the owners should be incorporated into the cash flow planning and strategic goals of the family business.  Of course in order to plan accordingly, the owners have to plan for themselves and share this information with management.  In larger organizations, professional managers or distant relatives are often reluctant to inquire about the personal finances of owners.  In a family business setting, it is crucial that they overcome this reluctance.  Wherever possible, professional managers and outside advisors should attempt to identify and incorporate the long-term plans of the owners into the strategic plan of the family business.  These professionals may also need to consider if they should take on an education role with the owners in order to facilitate proper consideration for the challenges to be faced.

Family business owners, managers and professional advisors must always be mindful of the unique nature of the enterprises they serve.  While this uniqueness can be made into strength, it also can create special and challenging problems that must be addressed if the business is to prosper and thrive for generations to come.  Communication, education and planning are key elements of success.

– See more at: http://dcfamilybusiness.com/thats-a-shareholder-problem/#sthash.oagxtFHJ.dpuf

 

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