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Family-owned businesses often face unique challenges when it comes to wealth extraction. Unlike traditional businesses where shareholders may not share personal ties, family enterprises involve owners across generations, each with differing financial needs, levels of involvement and perspectives. Striking a balance between the interests of active and non-active family members, while ensuring the sustainability of the business, is no small feat. We explore key wealth extraction strategies and practical considerations to help navigate this complex landscape.
28 February 25
Other Insights:
Attractive Employment Packages
Family members working in the business can be compensated through tailored employment packages, including salaries, benefits and bonuses. It is crucial to align remuneration with merit rather than entitlement to avoid perceptions of favouritism or overpayment. Transparent and merit-based remuneration policies can be valuable tools to prevent disputes and promote fairness.
Clearly defined employment policies ensure that compensation reflects contributions to the company, fostering harmony and professionalism within the family.
Dividends and Distributions
Dividends or profit distributions provide a direct method for shareholders to derive financial benefits from the business. While dividends can reward ownership, they may reduce funds available for reinvestment and growth. To mitigate potential disruptions, families should establish a clear dividend policy that aligns with the company’s operational and growth needs. Clear thresholds for reinvestment to ensure the long-term sustainability of the business should also be set.
Essentially, a structured approach to dividends ensures equitable treatment of shareholders while safeguarding the company’s financial health.
Wealth Diversification for Non-Active Members
Not all family members may wish to participate in the day-to-day business operations. These individuals might prefer to diversify their wealth through external investments. Families should engage financial and tax advisers to develop balanced, tax-efficient strategies. Families can also consider creating a family investment office or similar structure to manage diversified assets collectively depending on family requirements, needs and size.
External Sources of Finance
Leveraging external finance, such as debt or equity funding, offers an additional avenue for creating liquidity.
When exploring these options, families should with the help of specialised tax and legal advisors assess the company’s financial health and growth needs and evaluate the implications of losing control or decision-making power to external equity investors.
Shareholder Buyouts and Partial Exits
Family members seeking liquidity without participating in the business can consider selling their shares, either to other family members or external investors. Proper planning and valuation ensure fair outcomes and minimise potential disputes.
Sharing in the Family Vision
Families should be encouraged to participate in liquidity and liquidity discussions. Some key discussion points revolve around whether the business should be preserved for future generations or sold (partially or fully) to generate cash for the family. These conversations are essential to ensure that financial needs are met while preserving the long-term sustainability of the business.
Should you have any questions regarding this article series, please do not hesitate to contact Atiq Anjarwalla, Mona Doshi or Devvrat Periwal.
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Contributors
- Kajal Patel – Senior Associate
- Purity Wachira – Associate
- Stephen Deche – Associate
- Emmah Wakoli – Associate