Family businesses can face financing problems at the initial formation of the business, or years later. Financing problems and illiquidity are a frequent cause of family business failure. Advisers need to keep in mind that financing decisions in a family business may be driven by more complex forces than in similar-sized businesses. In a family business there are few decisions that are purely “business decisions.” Family factors nearly always play a role in decision-making. Sometimes these problems arise because of undercapitalization, cash flow problems, or both. The chapter details debt versus equity decisions, as well as the use of multiple classes of stock. The chapter also discusses the advantages of both bank and non-bank financing, including asset-based lending. Finally the chapter details tax-advantaged financing strategies including Qualified small business stock, ESOPs, and Section 1244 stock, as well as changes made by the 2017 Tax Act.
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