How strong capital planning helps protect a family business’s legacy

How to get started

Gene outlined three initial steps typically involved in developing a long-term capital strategy, though details will vary depending on each situation.

Step 1: Defining the financial objectives for both the family business and its shareholders

Well-defined financial objectives serve “as a compass that guides investment decisions and resource allocation,” says Peck. With these objectives clearly outlined, family enterprises can align their capital strategies with broader company goals while pursuing growth, profitability and increasing shareholder value.

For example, financial objectives can help an enterprise prioritize projects with the best return potential, benchmark the business’s performance, and set and meet shareholders’ return expectations. The objectives also guide key decisions, such as how to finance growth efforts and help business leaders determine a company’s risk tolerance.

Step 2: Assessing the family enterprise’s financial readiness

Examining financial readiness helps family businesses understand the capital they need for future growth and their strategic initiatives, pinpoint and reduce risks, make well-informed decisions about investments, rapidly seize market opportunities and achieve the strategic agility they need to adjust to evolving economic circumstances. This step involves scrutinizing the family business’s internal capital resources, its historical and planned uses of capital, and key financial metrics that drive value and align with the family’s strategic priorities. These metrics should be viewed through both historical and future-looking lenses.

In addition, by accurately framing potential risks or challenges to a company’s financial position, the family can “drive toward those highest value creation opportunities with the lowest opportunity costs,” says Shaw.

Step 3: Understanding capital alignment

Having a thorough grasp of the capital markets and capital providers allows a family enterprise to determine whether a potential investor is aligned with the family’s long-term financial objectives. “Capital alignment is important when you need external capital to grow,” says Peck, adding that it’s especially critical for families that intend for future generations to retain family ownership control.

To achieve this alignment, family businesses should consider these five key areas when engaging with potential investors:

1. Risk and return expectations
2. Governance and decision-making
3. Cultural fit
4. Strategic direction
5. Planning for liquidity events

By evaluating these areas, families can make informed decisions about which capital options are available and best aligned with their long-term objectives.

What makes a capital strategy strong?

Good long-term capital strategies share some key components. Jessica reiterated that clear, defined financial objectives are imperative. These goals should align with the needs and strategic vision of both the company and its shareholders, as well as with the family and business’s core values and long-term objectives. The financial objectives should be informed with an “outside-in approach” that enables the family to manage risk while prioritizing the business’s value-creation drivers.

An effective capital strategy is also proactive but flexible enough to allow for dynamic decision-making. The strategy should be constantly updated based on modifications to objectives, shifts in risks and other major changes.

Finally, the strategy should include a systematic and impartial method through which the family business can regularly review its investment decisions and anticipate challenges in terms of decisions related to capital allocation. Taking the time to thoroughly assess all the necessary aspects can result in a strategy that truly reflects the fundamental identity of the business.