68 Section 2 Chapter and Lecture Notes
Chapter 13 Financial and Wealth Management in the Family
Business
Learning Objectives
1. To understand the utility and the unique implications of modern finance to the
often privately-held family-owned business.
2. To discuss the value of financial metrics and financial literacy to the responsible
long-term ownership of family businesses.
Chapter 13 Essence
Business people communicate using accounting terms. As with any field there is a
business background. The accounting language must be mastered by family business
owners who wish to be effective shareholders.
There are some basics that every business owner needs to know, including understanding
the financial statements of the company; the balance sheet and the income statement.
Analyzing the financial statements of the company will help the owner(s) assess the
financial strengths and weaknesses of the business. It is also very important to
understand how the business generates and uses cash.
Ultimately we want to put all this information together to ascertain the future prospects
for the business. It is the future prospects that
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proceeds by using the financial metrics created to determine the value of the firm going
forward. Business people operate in a world of financial accountability and value
Discussion Questions
1. Why is financial literacy so important among family business owners?
Family shareholders expecting to fulfill their responsibility of aligning management
interests with shareholder priorities and holding management accountable need a
Family shareholders inactive in the business, with little understanding of management
and the time cycles involved in new strategies or new investments, can hamper the
effective operation of a family-controlled business. They can bring about significant
erosion of the founding entrepreneurial culture, which valued the role of hard work and
patient capital and tacitly understood the benefits of owner manager alignment.
2. What does the concept of fair market value refer to?
Fair market value is the price at which the property would change hands between a
willing buyer and a willing seller when the buyer is not under any compulsion to buy and
70 Section 2 Chapter and Lecture Notes
3. Why value a private family business?
There are quite a number of compelling reasons for valuing a private business, one whose
fair market value is not established by a stock market transaction. Among them are:
1) Major Business Transactions
a) Buying or selling a business
4. What are the three most common valuation approaches?
1. Income Approach
4. What are some of the factors driving the valuation of a family
business?
1) Growth
a) Economic outlook
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5) Company Specific Risk
a) Relative size
b) Industry position
6) Normalizing Financial Statements Given Entrepreneur or Family Ownership
a) Comparability Adjustments
Relevant Case Resources
The ABC Family Business case discussed throughout the chapter represents an
example of a mid-market family business valuation. Its step-by-step analysis provides a