In our experience, an informed and engaged shareholder base is the most important ingredient for preserving family harmony. The purpose of this short review of basic finance principles is to promote productive engagement by equipping family business shareholders with a conceptual framework and vocabulary for communicating their financial needs and preferences to the board. While family businesses face many important questions, the scope of this guide is limited to the three inter-connected financial decisions of capital budgeting, capital structure, and distribution policy. Our goal is to enable family business directors and shareholders to understand the manner in which these decisions are linked together and how they interact with corporate strategy to generate shareholder returns and value.
We start with a brief overview of return and risk, the two basic building blocks of corporate finance. Having laid that foundation, we proceed to address the three big financial questions facing corporate directors. Following a quick overview of the key finance concepts relating to each decision, we offer a list of related discussion topics for boards and shareholders. We conclude by reviewing how each of the three questions relate to, and depend upon, each other.
