EMH Insights

Separating Family and Business

When a business is owned (and managed) completely by family members, the line between personal activity and company activity can become unclear. This is particularly true in smaller family businesses where the employees, managers, and owners are all family members. However, to the greatest extent possible, any family business should make a concerted effort to delineate the boundary between personal expenses and activities and those of the business. Here we explain two reasons why it is important to conceptually separate the family from the business.

Maximize Financial Visibility

It is critical in any family business of substantial size and scope that family members do not treat the company assets as personal assets. Separating company financial activities from the personal financial activities of family members will increase the company’s financial visibility and provide the leadership with a more precise understanding of how the company’s separate business units are operating. The more separated these two sets of activities are, the more the company’s financial data will reflect the fundamental economics of the company, and not be obscured by personal expenditures.  This will allow the company’s leadership to have a better understanding of how past strategic decisions affect the business, how cash is being managed and utilized, and how to make the most effective managerial decisions moving forward.

Set a Strong Precedent

In addition to enhancing financial visibility and improving the managerial decision making process and outcomes, disallowing family members from spending company assets on personal expenditures in the short-term will also set a precedent for future family members that corporate assets cannot be used personally, and that company funds cannot be borrowed from the company at will. Compensation to family members for ownership should come through dividends, and if the family member is also involved in the business, a market-based salary should be used to compensate for management. Borrowing from the company (at will) should never be an option for family member employees.