Conflicting financial needs amongst family members, especially differences created by individuals in contrasting ages and stages of their lives, are a common cause of conflict in family business.
Parents with young families often find themselves in a major lifestyle building zone – encumbered by career development costs, family dependents, home mortgages, school fees, medical costs, holiday expenses and … collecting “toys” that make them happy. It all adds up to significant outgoings.
Their living costs, and general financial needs, are high, so they need as much income as possible to help get them through this phase.
At the same time: they’re young, and expect to spend many more years working in the business. To be there for them the business needs to retain money to invest in staying competitive, for the sake of its own future. This conflicts with paying large salaries. The young family member, and the business, have different and conflicting immediate financial needs, although their long-term aspirations for the business are closely aligned.
Meanwhile, older family members: grandparents, parents, aunts and uncles, should have lower everyday survival costs. However, they may need to get as much money as possible out of the business and into their personal coffers, to fund their (eventual) retirement. With longer life expectancies, and ever-increasing consumption and medical costs, this generation feels justifiably nervous about having enough money available to lead a reasonably attractive lifestyle, to the end of their natural days.
They want to get money out of the business, just like the younger family members. Their differences over relative financial needs are much less complicated, because their long-term interests are no longer aligned with those of the business. Unless they’re already financially secure, individuals nearing retirement tend to be far less concerned about the long-term prospects of the business, than they were during most of their working lives.
If there’s a perception that parents took more than enough out of the business over the years, and were somewhat ‘imprudent’ in their spending (ie: in their saving for retirement), their current needs and demands may not attract much sympathy.
There’s a complicated ‘Tension Triangle’ at play between ‘oldies,’ ‘young’uns’ and the business – all caused by differences in financial needs.
Fear feeds these differences: not having enough to live on in retirement; not being able to fund current lifestyle needs; having to financially support aging parents in retirement; not being able to maintain business competitiveness; reality clashing with expectations, and so on.
Like so many other causes of family business conflict, the best and most realistic solution requires a plan. Another option is winning the Lottery, but that’s not such a sure thing. Having good financial plans, and getting them in place in good time, is the best way to prevent conflicts arising over financial differences.
The second best solution requires development of a viable financial plan as soon as the potential for conflict over these differences is identified.
The third best solution requires a constructive response to an established conflict – in the form of developing the best financial plan possible, under all the circumstances. Easier said than done, once the bricks start flying.
A recommended process sequence follows. Note that all initial plans are purely provisional. They’re required to provide a credibly validated framework for discussions. The final outcomes will be the products of negotiation, and should be subject to objective reality checks:
1. Develop a realistic outline financial plan for retiring parents. Include adequate provision for an appropriately funded retirement (preferably, from their own, or from the family’s, existing resources and savings), and the release of any securities and liabilities connected to the business (eg: mortgage securities over a family home).
2. Build a picture of lifelong benefits derived by parents from business operations, with reference to notional income and savings allocations.
3. Obtain a realistic fix on external options and abilities to fund retirement / retirement shortfalls through: (a) sale of shares in the business; (b) ongoing consulting payments; (c) pension payments; (d) other (?). This can be quite an imaginative process.
4. Develop realistic financial plans for younger family members, based on reasonable projections and expectations for both lifestyle needs and future business performance.
Armed with the foregoing information, the family needs to help moderate individual expectations and balance competing needs. The aim is to develop a comprehensive, workable, go-forward plan that everybody is willing to sign up to. Everyone should be clear about what needs to happen; how it will happen, and their respective roles in making it happen.
A trusted non-family adviser, or skilled independent facilitator, with appropriate financial skills, may be able to add a lot of value to this process.