Financial Planning for the Family in Business

Financial Planning for the Family in Business

How Much is Enough?

A constant nagging issue for those owning family businesses, who are looking to hand over the reins to the next generation, is "will I have enough capital to see me through my retirement?".

Often the family business is regarded, when the business is established, as the founder’s future pension fund, but over time, as those running family businesses will confirm, the family dynamics take over. As the months and years pass the family business no longer becomes ‘just a business’ but instead is seen as part of the family and an asset that should be treasured, nurtured and preserved for future generations. The family business is seen as an additional member of the family that is discussed day after day over the dining room table and is regarded as the glue that binds the family together. This in turn, creates significant family stress when the founding generation are seeking to move towards financial independence and plan for life in retirement and the next generation want the baton to be handed over to them, possibly at nil or minimal cost.

With this issue in mind, early planning is essential. Ideally the first generation need to build up wealth independent of the family business. The reality however is that this strategy is seldom followed as it is at odds with the founder’s natural inclination which is to plough as much capital into the family business as possible to give it the greatest chance of long-term financial success and sustainability.

In a sense it doesn’t matter how wealth independent of the family business is built as long as the investments are diversified and the investor does not have all his or her eggs in the same basket. But again I return to the bigger question – how much is enough? How much independently invested capital do I need to see me through what could be up to 30 years plus in retirement? If we can answer the ‘how much’ question then the ‘where to invest’ question becomes a relatively simple problem to resolve.

In part the ‘how much is enough’ question is answered by asking some additional questions, for example:

What is my current financial situation? How much capital outside of the family business do I have invested now?
What liabilities do I have now and when will these be repaid?
How much do I have invested in pension/retirement plans?
What goals, dreams and plans do I have for life beyond the family business? Extended holidays? Unfulfilled hobbies that may require capital to see them achieved? Time with the extended family? Time with friends? Time invested in charity work or the ‘not for profit’ community? All of these goals require capital to see them achieved.
If I were to die within the next five years what would be my biggest regrets? Not spending more time with family and friends maybe?

There is no right answer to the ‘how much is enough’ question. It’s all about how much is enough for you?

Once your current financial position has been determined in terms of income and expenditure and therefore the capacity to save and your assets and liabilities have been established, then the answers to these questions become the foundations for the planning projections.

An assumed period of years to death needs to be used – I model my family business cash flows to age 99 as I want my clients to run out of life before they run out of money!! However with life expectancy increasing decade by decade, perhaps this assumption will need to changed as we continue to advise and plan for those in their fortieth year of retirement!!

This type of cash flow planning will quantify the capital required to meet all future goals and therefore help determine financial independence or otherwise. If there is sufficient independently invested wealth then all is well. Where there is a shortfall then further planning will be required. Most often, the family business will be called upon to provide some financial assistance to the exiting generation in the form of a preference dividend, annuity or salary for example where the planning process highlights a shortfall.