Relying Heavily on Income From Firm Can Hurt Family By ERNEST A. DOUD JR. If yours is like most family businesses, it is both your principal source of income and your single most valuable tangible assets. If that is the case, then the short version of this rule is: If you live high off the hog take care not to butcher it … because you don’t have another one. Recently we’ve been working with the four members of the second generation of a family business. It is a difficult situation that, originally, was not of their making. It is, in fact, part of the legacy from their parents. The trouble is, it has turned out to be anything but positive and seemingly not the result the parents (who are now both deceased) ever intended. Dad founded the business, and for years it was going, growing and very profitable. As a result, it made it possible for Dad and Mom to enjoy a very nice life. They raised four children and they, too, became accustomed to the good life. The kids grew up and one son and one daughter came into the business. They earned their keep, the business continued to thrive, and they received very attractive compensation . Mom and Dad agreed it was important to treat each member of their family equally. One way they tried to accomplish this was that over the years they gave each of the children equal shares in the business which is an S Corporation. Neither of the other two children was interested in the business. However, to preserve for the inactive children the lifestyle everyone had always enjoyed, Mom and Dad made sure that substantial S Corporation distributions were paid every year. After Dad died, Mom continued the practice. Then two things happened almost simultaneously. Some tough new competition came into the area, and Mom died. The two active siblings were faced with having to invest in the business to meet the new competitive threat That meant drastic reductions in distributions. The two inactive siblings were faced with a substantially reduced level of income. They didn’t want to sell away what they considered their “birthright” to the business. On the other hand, they weren’t ready to accept smaller distributions without a fight. Soon the siblings stopped talking to each other and it was lawyers talking to lawyers. Legal bills mounted while suits and countersuits were threatened. This true story is a tragic example of what can happen when family members are allowed to become too dependent on the business. When everything is going well, it can seem harmless. However, when the financial demands of the business conflict with the financial demands of family members … watch out! When your business is financially strong, think twice about any financial decisions you make that set the precedent of taking substantial cash out of the business. It can be a tough habit to break. Sooner or later you are going to have to reinvest in the business. If you’ve not only lived off the “fat”, but stripped away at its financial “muscle” as well, you can make it very difficult, if not impossible, to sustain the business as a viable entity. Then everyone suffers. Ernest A. Doud Jr. is the managing partner of DoudHausnerVistar, a consulting practice focusing on assisting clients to successfully manage family/business dynamics.