Reinvest or Distribute: Is Everyone Aligned When It Comes to the Family Business?

When an intergenerational family has an operating business at its center, deciding whether to reinvest profits into that business or distribute them to the family members is fundamental to avoiding disharmony, achieving personal and financial independence.

Will being forever tied to the company – an ‘engine’ of the family’s wealth, fed and maintained by its own profits – help unify the family and align them around a common purpose? 

Or is it healthier for the various branches of the family to undo the ties attaching them to the company, operate with greater financial independence and go forth to pursue their own interests?

Intergenerational decision-making

Advisors working with intergenerational families understand this well as an issue that affects second and successive generations. While first generations tend to have a clear idea of what they need to achieve when building a business, those inheriting that businesses are in quite a different position. 

For one thing, they have options, already more complicated. For another, they are usually far greater in number as children and children’s children create many branches of the same family. 

As with all difficult decisions, advisors often encounter a difference of opinion among family members when talking about how to deploy company profits. Left unchecked this can become a source of tension. It is the job of the advisor to raise these unwieldy subjects and support the family to understand the question, the potential options and agree an answer.

Disagreements on the subject speak to a fundamental difference of opinion that reflect the personal priorities of those involved. Too many families only confront the question when expectations have started to materially diverge, and relationships are starting to strain. 

Early intervention is key

The job of a family wealth advisor is to understand the priorities and aspirations of the individuals concerned in the provision of holistic advice that spans the family’s collective business assets and personal financial assets. The most successful families invest significant time upfront with their advisors to understand the financial realities of the business, discuss future capital needs and family expectations around spending and distribution. This puts everyone in the best position to understand the thought process behind the strategy and head off future tensions that have the potential to lead to disputes.  

The importance of a common purpose

For some, the operating business remains the primary engine of wealth and a common purpose that binds the extended family together. For others, building a separate pool of assets may provide greater resilience and flexibility and financial independence for future generations, and they may be motivated by a purpose beyond the business.  

Neither approach is right nor wrong and, in truth, it may never be possible to get everyone to agree. However, what is more important than agreement, is that everyone understands the plan, the reasons for the long-term objectives for the family and how decisions around capital allocation fit in with those goals. 

An advisor with experience of approaching similar situations with other families could have invaluable insights at this point. The challenge, though, often becomes more pronounced as ownership transitions through the generations. 

Managing differing priorities

Perhaps it is unsurprising that founders are more inclined to support the reinvestment route than other family members. First-generation family members often have an identity that is intertwined with the business, whereas family members from subsequent generations may be more likely to have an expectation of ready distributions from the business while being less emotionally connected. 

Managing the relationship between company management and the wider family requires a nuanced understanding of both the business dynamics and the family’s core principles. Advisors need to manage that tension, particularly when the founder is no longer actively involved and a new dynamic emerges, often favoring the embedded management team.

The role of governance

When managing differing expectations, transparency is key and governance is one of the most important tools in the advisor’s kit. Essentially, there should be no surprises. Having a governance structure, with a decision-making framework in place, helps everyone understand the rules of engagement and agree on a common purpose. Planning for this approach and ensuring that the family has been walked through and tested various scenarios in advance is key. 

When supporting business-owning families, advisor must stick to two guiding principles: first, the family and the business cannot be viewed in isolation and second, get ahead of future challenges by starting conversations early.  

Decisions about capital allocation are complicated and sit at the intersection of family aspirations, business strategy and long-term wealth preservation. Often, what is right thing to do financially, is not the right thing for the family. 

A Corient wealth advisor can help you try out and establish the right governance structures to help your family create a framework for decision-making that balances competing priorities. Get in touch to find out more.

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