Running any business is tough. Running a family business is even tougher. Family businesses carry their own unique set of challenges, and William Smith of Double Iron Consulting has dealt with many of them.
William Smith, Royal Cup Coffee’s former CEO, spent the early years of his professional life working with the company that had been operated by his family for decades. He still sits on the board. Now, he runs his own firm, Double Iron Consulting, which offers businesses, especially family-run businesses, advice that can set them up for the future.
William Smith specializes in helping family businesses navigate a particularly tough landscape, including advice on best financial management practices. Overall, the best financial advice for a family-run business is no different than for any other business, but there are just a few changes to consider.
Know Who Is in Charge
The best financial practice for any family business is to have a key decision-maker who makes all the necessary strategic and financial decisions based on sound advice. When William Smith worked at Royal Cup Coffee, he wasn’t the only family member in the business — but he was the CEO. His family members knew he made all the important strategy and financial decisions, and they trusted him to get those decisions right.
This is a philosophy that William Smith pushes heavily at Double Iron Consulting. He always suggests that family members designate a leader for the business, usually the person who is most involved with the business or has the most experience.
Having a single key decision-maker is important. When too many people with different opinions are involved in making strategic and financial decisions, it can affect a company’s bottom line.
Family Members Should Have Access to the Finances
Financial transparency is vital in a family-run business. Almost every family member is likely to have a stake in the business, so even if they’re not making decisions, they need to know what’s happening. Keeping the finances secret can cause conflict in a business, especially a family business. Non-decision-makers should feel free to ask questions about the finances.
William Smith often advises people in family-run businesses to share information regularly with family shareholders, including finances and other areas. Larger family-run businesses may have regular meetings to keep everyone informed.
Leaders Should Listen to Advice
This is where family-run businesses often differ from others. Even with a key decision-maker, there are other family members with a stake in the business. Some may be there to make money, while others may be there to protect the family’s legacy.
A decision-maker should consider the views of other family members with regard to finances and strategic direction. They don’t have to take all of the advice they are given, but they do have to remember that every decision they make can impact the financial well-being of the other family members. One poor decision could weaken or even destroy a business that previous generations fought so hard to build up.
Family members should always feel free to talk to the company’s leaders about its finances. If they don’t, it can cause strife that continues outside of the business.
A Family-Run Business Is Not a Personal Bank Account
William Smith has seen businesses falter because people treat business bank accounts like their personal ones. Many family-run businesses treat company finances as if they were their own funds to use as they please. They buy personal items as business expenses, take cash out whenever they need it, and more. No business can survive like that.
All finances should be kept separate. Unless it is being paid out as a salary, money should not leave the business for a family member’s personal expenses.
There may be situations where this can’t be avoided. Some people have taken loans from their family-run businesses, and this is sometimes acceptable under two definitive conditions:
- The money is accounted for.
- The money is paid back.
As soon as people get into the groove of borrowing money from a family business whenever they want, that business will die.
Business Goals and Family Goals Should Be Kept Separate
Every strategic and financial decision should be made with the financial success of the company in mind, preferably in consultation with other family members.
People who are involved in a family business cannot let their personal financial goals influence important business decisions. For example, let’s say someone has an eye on a new home and makes a business decision that can generate cash quickly but isn’t good for the company’s long-term financial health. They make a decision that helps them buy a home, but their business dies shortly after.
This type of situation can be especially tough in a family-run business since personal lives and business lives are tightly intertwined. This is why many successful family-run businesses have worked with business consultants such as Double Iron Consulting.
Estate or Succession Planning Is a Must
Succession planning is another area where a family-run business will differ from other businesses. When family members work for a company that their ancestors founded, they believe they’re entitled to a slice of the business pie. This can cause financial conflicts later.
Any family-run business needs to have a clear description of the following:
- Who owns what part of the business
- How the succession will be planned, i.e., who will fill roles later
Estate and succession planning can be tough. A business consultant will put business owners on the right path, but often this requires legal and financial legwork as well.
Talk to Estate Tax Advisors
There are some unique tax benefits for having a family-run business in the United States. It’s worth talking to a specialist tax advisor, who may help save the business money.
Financial planning in any business is difficult, but it’s even harder when family relationships are at stake. Those who have a family-run business are advised to work with multiple experts (business consultants, tax consultants, lawyers, etc.) to ensure that their business finances are kept in order. This can reduce potential conflicts among family members and can also increase the business’s income.