In business, a balance sheet is a very specific financial document that summarizes all your business assets. It is a record that objectively determines your company’s value based on its debts, assets, and shareholder equity at any given point in time. Essentially, if you were to sell your business tomorrow and pay off all of what it owes, what would you have left to show for it, fiscally speaking? That’s your shareholder equity.
But for most family-owned businesses, selling isn’t the goal. The goal is to build a sustainable business that can be passed down for generations. This very special legacy gift isn’t just about helping to support future generations, but also a matter of deep-rooted family pride.
When we speak about wealth and equity, then, there is so much more involved than what the typical balance sheet reveals. But how do you measure your family enterprise equity and why is that so important for sustainable multi-generational wealth planning?
Taking an Enterprise View: The 100-Year Plan
When we take an enterprise view, we begin with the end in mind. Rather than looking at your wealth in terms of a typical business—over two, five, or even 10 years—we look at twenty, fifty, or even 100 years. Hence, the 100-year plan! 100 years covers three generations, which is far more to consider from a planning perspective, but achievable with a well-rounded approach.
While a family’s business is typically its most important asset and dominant activity, the business is only one aspect of what each family values most. What’s more is that there are competing priorities in a family enterprise: personal, work, and business. To sustain such a precious asset over 100 years, each of these aspects must be tallied into the new family enterprise equity balance sheet.
The New Balance Sheet: 6 Elements of Wealth
When we take an enterprise view and create our new balance sheet, our aims are twofold: (1) increase the value of family assets over time and (2) decrease threatening liabilities. This will increase the family enterprise equity overall. But what counts as a family asset, and how do we define family liabilities if not in the traditional fiscal sense?
To help our clients navigate the creation of this new balance sheet, we have defined the 6 Elements of Wealth. These include both the quantitative and qualitative ways that families define their wealth:
- Financial
- Structural
- Heritage & Values
- Community
- Human Talent
- Family
Combined, these areas represent the total value of the family enterprise and include much more than just the bank account balance. They consider individual and family success, preservation, happiness, and intellectual wealth, as well. Diversification and nurturing in all areas will lead to being resourceful, resilient, and strong together in the face of life’s challenges. These are truly the foundations of a successful family enterprise.
Liabilities, on the other hand, are the elements of the balance sheet that deflate the value of the shareholder enterprise equity. Like the assets, they aren’t all quantitative in nature. Some non-quantitative threats include a lack of communication among family members, addiction, or poor financial health in one or more members of the family. In the balance sheet, we break these threats down into long-term, intermediate internal, intermediate external, and short-term in order to help our clients cover all the bases. With proactive and purposeful planning, families can mitigate or even eliminate the risk these liabilities pose.
Widening the Lens for Family Enterprise Equity
Ultimately, taking an enterprise view is an exercise in widening your lens, and not just to include a longer planning period. It is also an exercise in looking beyond the financials in terms of wealth and your family’s well-being, bringing structure and balance to your family for long-term continuity.
If you’re interested in learning more about our exclusive work with multi-generational family enterprises, we encourage you to download our more extensive guide here. Email Hannah Entenman at hannahe@will-kate.com or call 605-275-9181 to schedule a first conversation with our team.