We discussed whether this skill and knowledge is monetized for the benefit of him and his family. structures that pay salaries, bonuses, profits And there were benefits. but these funds were not Investment systematically. There is strong insistence about spending this money or investing it in material possessions. The problem for the businessman is that the rules of the game keep changing. There is competition to compete. Most of the time, friends and family who see a successful operation want to replicate it and hope that someone will help them get it set up and installed. Some protection is lost; New dangers come; Some plans fail; some Investment Get lost and run in hopes of finding ways to make a profit. We agreed that the business should be structured to deal with contingencies. The assets of the business must outweigh the shares in the trade. We identified our offices and property, investments in other businesses and business assets for diversified cash flows that may be destroyed buffer as needed.
Business financing is not formal. Lines of credit are available from suppliers who come from similar community and origin backgrounds. Lending and leverage are common. Informal funding is preferred over high cost for low disclosure. Books and accounts are maintained with a close watch on cash flow. Cost is controlled very tightly. Everything that saves tax is always welcome. Various entities have been paid enough under the desk to feel guilty about tax evasion.
We discussed how to transition to formal finance and clean and transparent books of accounts. There may not be scope to list on the stock exchange, but the creation of value transferred to the potential buyer is valuable. We also agreed that there was a need for formal Treasury operations.
There is no diversification. Nor is any surplus invested significantly in anything other than business. However, the lure of real estate and gold is too much to ignore. Real estate investments provide prestige and status among peers. Gold keeps the family happy and satisfied about their prosperity and wealth. Some stocks and bonds are kept, but very little matters. No persuasion changed his mind about separating the business from home and building diversified assets.
We moved on to the more difficult questions. What if the next generation is not interested in continuing the business? The equity that is created in the business is invested in creditors who rely on them with money and customers who protect the goods. Both cannot be redeemed, transferred or valued for actual -1 eligible cash. Without assets that store the value created by the business over the years, equity can simply remain unredeemed. How is money transferred? Primarily in the form of material possessions, the division between siblings is not considered proper, leading to quarrels and bitterness among themselves. The paucity of other assets, and the ambiguity in the books of accounts and dealings with others make it difficult to take charge of the assets after the death of the VC running the show. Estate planning was absent and it was common in the courts for cases surrounding the estate of the deceased.
How does one deal with risk? When the business fails, or when there is a debt that cannot be repaid, there is virtually no collateral. Usually personal property is sold or the family chooses to give up everything to flee elsewhere. There is also the stigma of bad luck to contend with when selling a property. Most people view failure as created by factors beyond one’s control. Superstitions and rituals continue to ward off the ‘evil eye’. Formal risk management systems are seen as a joke and theoretical. What happens when disease hits? There is hardly enough insurance cover. Paying premiums is painful. Nor is the delegation or succession planning clear. Family members do not fully know or understand how the business is being run. Businesses have no stock of money other than stocks and physical assets for emergencies. Many businesses are taken over by relatives, who can be philanthropists or greedy or anything in between.
What happens in old age? Most assume they will run their business until they pass. However, the fear of lifestyle diseases is high. There is no retirement fund or plan. Denial rule. The assumption is that it is the business that generates income and profit and that it will survive and continue to operate. My reader told how even the eldest surviving members of the family were paid enough from the profits and lived comfortably in their big houses. This model of comfort from business income is so ingrained that its risks cannot be questioned. As we discussed, we could see that the model in the mind of the small businessman was smart management for profit, clever leverage for the benefit of the owners, stable and generous sharing of income with the family, lavish spending from these surpluses, and ostentatious Property to show physical assets. These don’t fit the rules of personal finance as we know them.
As we discussed how these businesses can operate in a very personal, focused and high-risk environment, it became apparent that there were many home and family businesses that operate at this scale. Wealth is being created. It is also heavily spent. Property is created but poorly used and bequeathed. The problem is that while risk is denied, measures are not readily adopted.
Author: President, Center for Investment Education and Learning