Most family business owners fail to look at their company from an “investor” perspective. They confuse business returns on equity with realized shareholder returns.
Low levels of cash distribution result in lower shareholder realize returns, inadequate shareholder liquidity and increased exposure to unforeseen “tail risks.” This often leads to problematic family dynamics that create major rifts within the family and threaten the longevity of the company.
Look at your family owners as investors. You must run the family business to maximize realized shareholder value, and continue to address individual and business goals diligently to keep the ownership group satisfied and aligned.
Focus sharply on cash flow generation and distributions, in addition to profits. Measure and report on annual changes in equity valuation, realized shareholder returns and performance against annual business plans. Consider partial transfer of “trapped” accumulated wealth in the operating businesses into newly created family investment entities. This will diversify your family's investment portfolio, provide increased asset protection and shareholder liquidity, and reduce overall family wealth management risk.
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