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Helping Family Businesses
Prosper Across Generations®

Funding Family Needs Can Build Commitment

When family businesses simultaneously seek to fund growth and provide rewards to shareholders using internally generated cash flow, they often find inadequate money to go around. Trade-offs are required which may compromise business strategy or leave shareholders in conflict. Since neither compromised strategy nor shareholder conflict bodes well, family businesses seek ways to reduce cash flow demands.

One way to use family funds more efficiently, and thus reduce demands on the business for money, is to deal with certain family needs and goals collectively rather than individually. Grandparents recognize this principle,when they decide to provide funds for their grandchildren’s college educations. Using one fund to provide money for several grandchildren’s college requires less capital than building a separate fund for each child simply because they don’t all use the funds at the same time. Moreover, the second generation needn’t make distribution demands on the business to pay for college.

What grandparents provided more or less informally, the second generation might consider formalizing by establishing one or more “family funds,” often in the form of trusts, for specific family purposes. Such funds can provide a number of benefits in addition to providing money for the purpose designated. In addition to reducing money-related demands on the business, if they are properly designed and managed, they can promote family identity and harmony and provide the common ground that enhances family cohesiveness and commitment to on-going shared ownership of the business.

In addition to education, we’ve seen family funds established for a broad range of purposes. Many families have created funds to support individual and group philanthropic goals. Others support family member entrepreneurial endeavors with a family venture capital fund. In addition to private school and higher education, we’ve seen funds support “family welfare” (health, childcare, children’s summer activities, special needs), home mortgages, travel, family meetings and other family building activities, and maintenance and development of family properties for family purposes.

While the family business was probably the original source of the money used to establish the funds, often the money comes from family members banding together in a common cause or from estates.

Discussion of the creation and management of specific purpose “family funds” is an excellent family meeting agenda item. Each fund requires direction and oversight. Each should be operated consistent with a clear mission, policies and procedures. Each fund could use directors or trustees, creating opportunities for multiple family members to become involved if not in the family business, then at least, in the business of the family.

Special care should be taken to assure that family funds do not come to be perceived as entitlements or as invitations to become unproductive. Procedures should be established, as well, to replenish funds as they may be depleted by use. Venture capital funds should be replenished by returns from successful investments. Home mortgage funds should be repaid, education and philanthropic funds could be continuously added to by family members who support or benefit from the funds’ mission. A key to the success of family funds is the development of a family culture that inculcates in family members (especially children and young people) obligations of stewardship, service, and giving back – not just receiving. The family should constantly remind itself of the source of the funds and the legacy the funds represent.

 

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