For many years, Bethany didn’t ask a lot of questions about her family business, a successful third-generation technology company.* Bethany had pursued a career as an educator outside of the family business, but she was proud of how the business had grown rapidly and profitably under her uncle’s leadership. She trusted him to make the right decisions for both the business and the family. Historically, the business had created a lot of value on paper for the owners but had distributed relatively small dividends.
Is Your Family Business on the Path to Growth?
The company’s reinvestment rate is the single most important number to consider.
March 15, 2024
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Summary.
A family business’s “reinvestment rate” — the percentage of all the profits that are reinvested in the legacy business or new ventures, instead of distributed to owners — is the single most important number to look at to determine whether the business is on track to grow. No other number is a better expression of owners’ intent. Reinvestment rate is the answer — explicitly or implicitly — to the question of: How committed are we, as owners, to reinvesting our capital in this business together? When family businesses start focusing on reinvestment rate — rather than on profits or dividends — it focuses them on purpose (“Why do we own these assets together?”) and return on investment (“How could the business use these funds?”), rather than a cash cow for dividends (“What do I get?”). Reinvestment rate can signal whether your family business is on a sustainable path for growth or at risk of bleeding itself dry. How high or low owners set the reinvestment rate is still the best signal of their intentions for the business in the long-term. In this article, the authors discuss how to determine the right reinvestment rate for your family business.