In a family business, the impact of any profits are seen and felt daily by those involved in the business, as well as those affected by the business’ performance. A good turnover means those extra lessons for an owner’s child, or a new home for a family member.
The business is borne out of the family’s need, and its main responsibility is to look after those involved in it.
True profitability in a family business is not just about the figures and bottom line – but is rather measured in the goals and lives of the family behind the business.
Family Stakeholders must see the profit going towards the right expenses.
The firm can get buy in from stakeholders when they can first see that family members within the business are looked after properly in terms of salary and benefits, and how family members affected by, but not directly involved in the business, are treated by the company’s Related Party Transaction Policy.
Lastly, the Philanthropic Expenditure Policy is also of high importance to stakeholders – showing that money is being spent on the right causes that are close to the family’s values.
As much as the context and qualitative element of the profit is important to the business, so is the quantitative results to discern just how well the business is performing.
In order to know if the year’s profit is good or not, it must be measured against the following:
These factors gives the profit true context and meaning to determine the health of the business in its own right, and not against the family’s needs. As important as it is for the business to serve the family, it can only do that successfully when it is treated as its own free-standing entity, with its own needs, when it is assessed.
Considering the sometimes differing goals of these two entities – the family and the business – within a family business, it’s important for a middle ground to be struck.
While the voice of the family in the different levels of the business are important, at the end of the day decisions regarding the business should be left in the hands of shareholders and shareholders alone. They are the ones with feet in both camps and will have the needs of both the family and the business at heart.
No decision should be made in a vacuum though, as for the family to continue to support the business, they need to understand and buy into the profitability goals of the business at all times.