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Family Business Off-Balance-Sheet Financing

Part of the Enron scandal involved the company’s extensive use of “off-balance-sheet financing.” Interestingly, family businesses also use off balance- sheet financing in very positive ways. The practice can facilitate generational ownership transfer, assist with estate planning, and aid financial management.

The most common “off-balance-sheet financing” involves company-owned real estate. Land and building carried on a family business’ books can be moved “off balance sheet,” transferred to the older generation or a family limited partnership and leased back to the company. Lease payments can finance retirement, create family liquidity, and/or equalize assets among beneficiaries in an estate plan. The business’ needs for additional real estate or capital equipment, it can be handled in similar fashion with family members purchasing assets (often taking on personal debt to do so) and renting them to the company. Again, neither the assets nor the debt show up on the balance sheet while cash flows from the business to members of the family.

 

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