This type of investment begins to have the overlap of Family, Business and Ownership, and needless to say the "Family" part has the most influence. The Venn diagram here is the illustration of this overlap and is the cornerstone of describing a family business.
You probably want to evaluate your son or daughters business investment request and they should create some form of business plan. You may immediately consider having your accountant look at this family business plan. I would not advise banking solely on your accountant to evaluate the business plan. Use the accountant to perform a critical analysis of the proformas.
However a family business plan is much more than financials. My viewpoint is this:
- It is the articulation of how an idea is put through a feasibility analysis
- If feasible, then the development of a marketing plan. All business rest on the success of "going to market", hence the critical importance of a marketing plan.
- If you can create a convincing marking plan, and this is another areas where you should have a 3rd party review, an Operating Plan would come next.
- Build Up Sales and Cost Assumptions come next to create your financial financial forecasts.
A better approach to 3rd parties is to include other business professionals along with your accountant. These can be consultants and Small Business Development Centers. A great resource is seeking out a university that has an Entrepreneurship Department. There are many professors and MBA students that can help in the business plan evaluation. For example we have our Business Ventures Program, that works with entrepreneurs to refine their plans for greater success. This is one way to be objective AND create the necessary boundaries between parent and investor.
A wonderful structure is The Family Bank. It allows you to invest in your children and have some structure and boundary separation. You can structure this as formal as your needs determine. It allows the parent to wear two hats:
- the parent hat
- the investor hat.
It allows you to say "as your parent I want to support you as my child", and then you can flip the hat to say "as your financial backer, here is what the 'bank' needs to make a decision".
The great thing about a Family Bank is it allows the return of capital to the "bank". The Family Bank is what we call patient capital, giving your children the extra breathing room they need to establish the business with feeling entitled the money, just because they are the son or daughter.
The return of principle and interest to the bank allows the parent to reinvest in the future for other children and/or to preserve and hopefully grow the family economic capital. It preserves the financial estate for the next generation.
All the best!
Tips on Family Business
Dom Celentano
Visit my Silberman College of Business Academic Site
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