When it comes to the financial planning needs of family-owned businesses, family businesses and their stakeholders have unique planning needs and distinctive financial planning opportunities that should be identified and carefully taken into consideration both by the family business and by family business advisors. The result of such careful planning can mean nothing less than family business success or failure, and thoughtful planning can lead to successful outcomes vis-à-vis multi-generational business succession, wealth preservation, and overall family happiness.

Family Businesses Are Different

Relationships are important in all businesses—family-owned and non-family-owned alike. When it comes to family-owned businesses, however, relationships play a central role. Family business advisors Josh Baron and Rob Lachenauer maintain that in non-family businesses, relationships are almost exclusively centered on the business aspect of the relationship; with family businesses, however, they assert that there exists an important nexus between three kinds of relationships: family, business, and owner relationships.[1]

The interplay between these relationships, explain Baron and Lachenauer, plays out in nearly every big family business decision: “…each big decision you make—to curtail a dividend payment to your mom to protect your balance sheet, to buy out your cousin, to skip your family reunion, or to fire your brother—is within a complex expression of family emotion, business hierarchy, and owner power. Your decisions are never just straightforward business or family calls.”[2]

Understanding and planning with these relational dynamics in mind, therefore, becomes a critical first step toward the goal of achieving long-term family business success, preserving family wealth, and obtaining family well-being, areas in which all three relational dynamics—family, business, and owner—regularly intersect and can have important personal and financial planning implications. The family business and its advisors who are cognizant of this and who can plan with such relational dynamics in mind will be better positioned to navigate family and business relational complexities, better prepared to make important decisions, and more aptly suited to adapt to an ever-changing business landscape.

Distinguish Between Business, Owner, and Family Goals

Recognizing that family, business, and owner relationships overlap in important ways and can have a significant impact on business decision-making, it is important to understand and thoughtfully apply such relational nuances to the process of family business and personal financial goal planning.

The family business owner should come to view and understand oneself as not only an owner in the business, but also a family member with an identity that exists apart from the business, and further as an individual family member who has a personal and family identity that is distinct from a shared family identity. While there are no doubt important points of crosspollination between personal, business, and family relational goals, it is important to distinguish between the three. A strategic plan for the business, for example, might involve reaching a revenue goal by a specified time, increasing profits, entering a new market, hiring key talent, or reducing debt to a strategic level. An owner’s personal goals, on the other hand, are unique to the owner, examples of which might include targeting a specified retirement and exit from the business, aiming for a net amount of annual retirement liquidity, spending time away from the business, reducing personal taxes, providing for a spouse, or perhaps giving wealth away to charity. And, a family business stakeholder will also have distinct family goals, examples of which might include providing for the education of children or other heirs, cultivating cherished family values, protecting a family legacy, ensuring that family wealth is preserved and passed to the next generation, or cultivating shared family experiences.

Again, there will be expected overlap across business, personal, and family goals in a family business financial planning context. The key to planning success, therefore, is to understand how and when they intersect, when it is appropriate for goals to remain distinct across relationship dynamics, and to try and understand the logical implications of decisions that are made across and within the various contexts. This nuanced approach to goal planning in a family business context should allow the astute family and team of family advisors to create more concrete, nuanced, and effective plans that will lead to better family business and personal planning outcomes.

Family Business Planning Opportunities

Family businesses also have unique financial planning opportunities. For example, estate and tax planning can become especially germane (and complex) in the context of a family-owned business. Successful family businesses, for example, are at times uniquely able to benefit from “estate freezing” techniques, techniques that, when properly applied by skilled tax and estate planning advisors, can preserve wealth and, in some cases, create significant tax savings. “Estate freezing” is a broad term, but the general idea behind such strategies is to “freeze” the current value of an estate, sometimes while providing a present value income stream to an owner, while simultaneously shifting the future appreciation of the estate to other heirs. For family members contending with taxable estates, such strategies can preserve wealth vis-à-vis estate tax savings, while also accomplishing legacy planning for future heirs. Estate freezing strategies can involve a panoply of technical planning ideas, strategies that include but are not limited to intra-family loans, family limited partnerships, family LLCs, installment sales, private annuities, stock recapitalization strategies, a wide array of gifting strategies, Grantor Retained Annuity Trusts (GRATs), and Intentionally Defective Grantor Trusts (IDGTs).

Other planning topics should also be considered when engaging in financial planning for a family business. What would happen if, for example, a key family member passes away or incurs a long-term disability? Would other family members be able to run the business? Do they want to? Are there non-owner members who, by default, would become owners along with existing members? Would there be enough liquidity on hand to pay for tax liabilities or buyouts, or would the business have to be sold in a fire sale due to lack of planning? When these and other strategies are considered and applied in the unique context of family business relationships, a family business may be able to avoid a needless wealth drain and instead create and preserve intergenerational wealth, maintain an important family legacy, and ultimately help to ensure family, business, and personal happiness.

Summary

Family businesses involve a unique interplay of business, personal, and owner relationship dynamics. Successful family businesses recognize this, and they create intentional financial plans not only for the business, but for each of the relevant family business stakeholders. When such personal planning is coordinated by the right team of skilled family business advisors, families can proactively position themselves to be able to benefit from wealth preservation strategies, strategies that can ultimately lead to long-term business, personal, and family happiness.

About the Author

Lynn M. Dunston is a recognized expert on financial planning for family business owners. Lynn is a CERTIFIED FINANCIAL PLANNER™ professional, an Accredited Estate Planner®, and an Enrolled Agent of the IRS. As a partner with Moneta, an independently owned wealth advisory firm, Lynn is a business owner himself, and he enjoys creating bespoke estate, tax, and wealth advisory solutions for successful family businesses.

[1] Joshua Baron and Robert Lachenauer, Harvard Business Review Family Business Handbook: How to Build and Sustain a Successful, Enduring Enterprise (Boston, MA: Harvard Business Review Press, 2021), 13.

[2] Ibid.

© 2022 Moneta Group Investment Advisors, LLC. All rights reserved. These materials were prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax, or legal decision. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.