Speak Up! How Tax Laws Affect Your Business Matters
Meeting the liquidity needs of the family and the business is a balancing act that can help continue growing the enterprise.
One of the biggest disruptions to the continued growth of family-owned companies can be disagreement over how to satisfy shareholder liquidity needs. The liquidity requirements of family members can be different for each generation participating in ownership, and a shareholder liquidity strategy can help manage the short- and long-term capital needs of both the owners and the business as it continues to grow.
Shareholder liquidity planning is likely to take on increased importance in the near future because of three interrelated factors that can easily disrupt a multigenerational business:
- Transition wave disruption. Three-quarters of multigenerational businesses are owned and led by people who are poised to transfer ownership and control to the next generation, both through planned and unplanned exits.
- Personal wealth gap. Family members who are not direct owners of the business, but rather beneficiaries of the business through trusts or other indirect interests, are experiencing a gap between what they perceive their interest in the business to be worth vs. their available cash or personal net worth.
- Increasing number of inactive owners/beneficiaries. There are a growing number of people who rely on the business for income but are not employed by the business. As a result, they are less likely to understand corporate growth strategy or take a long-term outlook on their investment in the business. They tend to want earnings distributed rather than reinvested in the business.
Navigating these factors requires balancing the capital needs of a business, such as working capital, major expenses or acquisitions, with the family’s financial needs, including lifestyle expenses, retirement expenses and tax liabilities. The challenge is creating a mechanism that does not drain too much money from the business, potentially stunting growth and reducing funds for current and future owners/beneficiaries. This balance requires a well-defined business growth strategy, based on the company’s free cash flow and projected capital needs, that supports why money is being kept in the business rather than distributed to the owners.
Navigate the complexities of family business liquidity. Download the EY whitepaper and secure your business’s future.
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As trusted advisors to ambitious business-owning families, including more than 90% of the world’s top 500 family enterprises, EY teams have the experience and know-how to support the entire family enterprise — family members, their family business, and their family office.
The EY approach to working with family enterprises is anchored in the EY Family Enterprise DNA Model. This model supports both the personal and business performance agendas of family enterprise leaders by pinpointing four key areas of focus to achieve their ambitions: family, values, business and assets. We combine our understanding of these focus areas with decades of experience working with the world’s most entrepreneurial families to create a framework for guided conversations on topics that matter most to family enterprise owners.
EY Family Enterprise professionals can support you in identifying and optimizing the drivers that impact family businesses’ growth and longevity, preserve wealth, and culture, and solidify intergenerational legacies. Family Enterprise Business Services | EY - US
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