Family businesses often depend on two key sources of capital: financial and human. A business exists to manufacture products and/or service customers, and the fruits of that activity are the creation of financial capital. When a business creates financial capital which will not be used in the business it will distribute this excess capital in the form of dividends to its shareholders. It is critical to make an informed decision about how to use the financial capital that is created. A commitment to reinvest capital and grow shareholder value is also fundamental to the future of the business and the family who owns the business. Therefore, it is important to align what is best for the business and the family when making decisions for the payment of dividends.
Balancing the financial needs of the business and the family requires planning with the view that the business must continue to produce sustainable profits and cash flow for current and future generations. A fair, well-thought-out dividend policy that includes reinvestment in the business and provides a predictable dividend income stream is important and can be accomplished. Nevertheless, family members must realize that the expectation of ever-expanding dividends is difficult to meet because families often grow at a faster pace than the business. Therefore, the family needs to know and understand that the business will most likely not be able to support them in the lifestyle they have been experiencing and alternatives to the business’s current dividend policy may need to be considered.
