Family business glossary: 335 terms in plain English.

A 1031 exchange is a US tax rule that lets an owner sell investment or business real estate and put off paying capital gains tax (tax on the profit from the sale) by buying other qualifying real estate with the proceeds. Strict deadlines apply: replacement property must be identified within 45 days and purchased within 180 days, and the money must be held by a qualified intermediary (an independent company that holds the sale proceeds), not the seller.

Why it matters: Families can keep swapping properties for decades without paying tax on the gains, and if the property is held until death, the heirs may receive a step-up in basis that erases the deferred gain. Since 2018, only real estate qualifies; equipment and business interests do not.

Note: US-specific (Internal Revenue Code Section 1031). Deadlines are strict and generally cannot be extended except in federally declared disasters. Legal review recommended.

An 83(b) election is a filing with the IRS by someone who receives company stock or other property that is subject to vesting, meaning it can be forfeited until certain conditions are met. The election chooses to pay tax now on the stock's value at the time it is received, instead of later when it vests and may be worth much more. It must be filed within 30 days of receiving the stock.

Why it matters: When the stock's current value is low, filing converts future growth from ordinary income into capital gain and starts the holding period early. Missing the 30-day deadline cannot be fixed, and if the stock is later forfeited, the tax paid is not refunded.

Note: US-specific (Internal Revenue Code Section 83(b)). The 30-day deadline is strict. Legal review recommended.

An accredited investor is a person or entity that meets US Securities and Exchange Commission tests of income, net worth or professional knowledge that allow them to invest in private offerings not registered with the SEC, such as private funds and private company stock. The SEC reasons that such investors can bear the risk of investments that come with less public disclosure.

Why it matters: Many private deals and funds are open only to accredited investors. Family trusts and entities must also meet the tests, which affects how family members invest together.

Note: US-specific. Thresholds are set in SEC Regulation D and have been subject to review; verify current tests.

An active family member is a relative who works in the family business, whether or not they own shares. They experience the business daily and often feel they deserve more say than relatives who do not work there.

Why it matters: Tension between active and inactive family members is one of the most common conflicts in family businesses. Separating pay for work from returns on ownership reduces it.

Add-backs are expenses that are added back to a company's profit to show what it would earn under a new owner, because the expense is personal, one-time or will not continue. Examples are the owner's personal car, a family member's salary for a job not really done, or a one-time lawsuit settlement.

Why it matters: Each supported add-back raises the value by a multiple of itself. Aggressive or undocumented add-backs damage the seller's credibility with the buyer and can sink the deal.

An add-on acquisition is the purchase of a smaller company to be merged into a larger platform company (the first, bigger company the buyer purchased in that industry). Add-ons are often bought at lower multiples of earnings than platforms.

Why it matters: Owners of small businesses often sell as add-ons without realizing it, and the price reflects that. The buyer's plan for the company also determines what happens to its employees and brand.

Adjusted EBITDA is EBITDA (profit before interest, taxes, depreciation and amortization) after adding back or removing items that will not continue under a new owner. Common adjustments include above-market owner salary, family members on payroll who do not work there, personal expenses run through the company, one-time legal costs and rent paid to the owner above market rates.

Why it matters: A seller's adjusted EBITDA is often the starting point for price, and buyers test every adjustment. Adjustments that cannot be supported with records are removed during due diligence, and the price drops with them.

An advisory board is a group of experienced people who give advice to the owner or CEO but have no legal authority and no fiduciary duty, meaning no legal obligation to the company. The owner can accept or ignore their advice. Many family businesses use an advisory board as a first step before creating a formal board of directors.

Why it matters: An advisory board brings outside judgment without giving up control, which makes it easier for a founder to accept. Its weakness is that it cannot force a decision, so a founder who ignores it faces no consequence.

Alternative investments are anything outside public stocks, bonds and cash, such as private equity (stakes in private companies), private credit (loans to private companies), venture capital (stakes in startups), real estate, hedge funds, farmland and collectibles. Family offices typically hold a much larger share of alternatives than individual investors.

Why it matters: Alternatives can raise returns and diversify risk but are usually hard to sell quickly, have higher fees and require more expertise to evaluate.

The annual gift tax exclusion is the amount a person can give to each recipient every year without using any lifetime exemption (the total a person can give tax-free during life and at death combined) or filing a gift tax return. Married couples can combine their exclusions for each recipient.

Why it matters: Yearly gifts of business shares or cash to children and grandchildren add up over decades and move growth out of the estate at no tax cost.

Note: US-specific. Per IRS, the annual exclusion is 19,000 dollars per recipient for 2026 (checked September 2026); it is indexed for inflation.

The applicable federal rate is the minimum interest rate the IRS publishes each month for loans between related parties, such as parents and children or an owner and a family trust. Rates differ for short, mid and long-term loans.

Why it matters: Lending at or above the rate avoids having the loan treated partly as a gift. Locking in a low rate on a long-term family loan can move substantial growth to heirs.

Note: US-specific.

Arbitration is a private process where a neutral person or panel, the arbitrator, hears both sides of a dispute and makes a decision that is usually binding and very hard to appeal. It works like a private court. Family agreements often require mediation first and arbitration if mediation fails.

Why it matters: Arbitration keeps family disputes out of public court records. The trade-off is that a bad decision is usually final.

Note: Enforceability rules vary by state and country; confirm with counsel.

Asset allocation is how a portfolio is divided among types of investments, such as stocks, bonds, cash, real estate, private companies and private funds. It is the main driver of how much a portfolio can earn and how much it can fall in a bad year.

Why it matters: Families that just sold a business are often very concentrated in cash or a single asset and need a deliberate allocation plan. An allocation should match when the family will need money.

Asset protection is planning that legally shields a family's wealth from future lawsuits, creditors and divorces, using tools such as separate entities for risky assets, irrevocable trusts, insurance and certain retirement accounts. Some US states allow self-settled trusts that protect assets even from the person who created them.

Why it matters: Business owners face lawsuit risk that can reach personal assets. Planning must happen before a claim arises; transfers made after trouble starts can be reversed as fraudulent.

Note: Rules vary widely by state and country. Legal review recommended.

In an asset sale, the buyer purchases the company's assets, such as equipment, inventory, contracts and brand, rather than the owner's shares, and usually leaves most liabilities behind with the seller's company. Buyers often prefer it because they can choose what to take and may get tax benefits.

Why it matters: For owners of some types of companies, an asset sale can result in higher taxes than a stock sale. The tax difference should be priced into the deal.

Note: Tax consequences are US-specific and depend on entity type; confirm with a tax advisor.

Asset-based lending is a loan whose size is tied to the value of specific assets, most often receivables (money customers owe) and inventory, and sometimes equipment or real estate. The amount available rises and falls as those assets change.

Why it matters: ABL can provide more borrowing than a cash-flow loan for businesses with lots of inventory or receivables but uneven profits. It requires frequent reporting to the lender.

Assets under management is the total market value of investments a firm manages for its clients. Many advisors charge fees as a percentage of assets under management each year.

Why it matters: Percentage fees grow with the portfolio even if the work does not. Families with large portfolios often negotiate flat or tiered fees.

An auction process is a structured sale in which an advisor contacts many potential buyers at once, collects offers in rounds and uses competition to improve price and terms. A targeted auction contacts a smaller hand-picked group.

Why it matters: Competition among buyers is the most reliable way to raise price. It takes longer and means more people learn the company is for sale.

A beneficiary is a person or organization entitled to benefit from a trust, will, insurance policy or retirement account. Trust beneficiaries may receive income, principal or both, under the rules set in the trust.

Why it matters: Beneficiary designations on insurance and retirement accounts override the will, and outdated designations, such as a former spouse, are a common and costly mistake.

The board chair leads the board of directors: sets meeting agendas, runs the meetings and manages the relationship between the board and the CEO. In many family businesses the founder holds both the chair and CEO roles. Separating them, with the founder as chair and a successor as CEO, is a common step in succession.

Why it matters: Separating the roles gives a successor room to run the company while the founder keeps a meaningful role. A founder who keeps both titles past the handoff date usually keeps making the decisions too.

A board evaluation is a regular, usually yearly, review of how well the board of directors is working, often through confidential questionnaires or interviews run by the chair or an outside advisor. It looks at meeting quality, skills on the board and the board's relationship with the CEO.

Why it matters: Boards rarely improve without a structured review, and a family board that never evaluates itself tends to keep underperforming members out of politeness.

A board of directors is the group of people legally responsible for overseeing a corporation on behalf of its owners. It hires, evaluates and can remove the CEO, approves strategy, major spending and deals, and has fiduciary duties, meaning a legal obligation to act carefully and in the company's interest. Its members are elected by the shareholders.

Why it matters: Many family boards exist only on paper and never meet, which leaves no one able to hold a family CEO accountable. A working board with outside members is one of the most common steps families take before a leadership handoff.

Book value is what a company's balance sheet shows as its owners' share: total assets minus total liabilities, using accounting values. It is usually based on what assets originally cost minus depreciation, not what they are worth today.

Why it matters: Buy-sell agreements that set price at book value often produce a price far below what the business is really worth, which can shortchange a deceased owner's family. It is rarely an appropriate price formula for an operating business.

A business broker is an intermediary who helps sell smaller businesses, often those valued below a few million dollars, where the buyer is frequently an individual who will run the company. Brokers typically list the business, screen buyers and help with negotiations, usually for a success fee (a fee paid only if the sale closes).

Why it matters: Broker and investment banker markets serve different buyer pools, and picking the wrong one for the size of the business can limit the price.

A business continuity plan is a written plan for keeping the company running through a disruption, such as the loss of a key person, a natural disaster, a cyberattack or the loss of a major supplier. It lists critical functions, backup people and systems, and who has authority to act.

Why it matters: Owner-led businesses often have critical knowledge, passwords and relationships held by one person. A continuity plan reduces the damage if that person is suddenly gone.

The business judgment rule is a legal principle in US corporate law under which courts generally will not second-guess a board's decision if the directors were informed, acted in good faith and had no personal conflict. It protects directors from being sued simply because a decision turned out badly.

Why it matters: The protection disappears when a director has a personal interest in the decision, which is common in family companies. Documented, conflict-free decisions keep it in place.

Note: US-specific. Application varies by state; Delaware case law is the most developed.

A buy-sell agreement is a contract that says what happens to an owner's shares when a trigger event occurs, such as death, disability, divorce, retirement, being fired or wanting to sell. It sets who must or may buy the shares, how the price is set and how the purchase will be paid for. It can be a separate contract or a section of the shareholders agreement.

Why it matters: Without one, a deceased owner's shares can pass to a spouse or child who has no role in the business, and the remaining owners may have no right or no money to buy them. An agreement with an outdated price formula can force a sale at a price nobody would accept today.

Buy-sell funding is how the money will be found to buy out an owner's shares when a buy-sell agreement (the contract requiring or allowing a buyout when an owner dies, leaves or divorces) is triggered. Common sources are life insurance on each owner, disability buyout insurance, company cash reserves, a bank loan or payments to the departing owner over several years.

Why it matters: An agreement that requires a buyout the company cannot afford can force the sale of the whole business or leave a widow waiting years to be paid. Insurance is usually the cheapest way to fund the death trigger.

Note: Tax treatment of insurance-funded buyouts depends on structure; a 2024 US Supreme Court case, Connelly v. United States, held that company-owned life insurance used to redeem shares can increase the company's value for estate tax purposes. Legal review recommended.

Bylaws are the internal rulebook of a corporation. They set out how directors are elected, how many there are, how meetings are called, what counts as a quorum (the minimum number needed to hold a valid vote) and which officers the company has. The LLC equivalent is the operating agreement.

Why it matters: Many family companies still run on bylaws drafted decades ago that do not match how decisions are actually made. When a dispute reaches a court, the bylaws control, not the family's habits.

A C corporation is the standard US corporation that pays income tax on its own profits; owners then pay tax again on dividends they receive. It can have unlimited shareholders and multiple classes of stock.

Why it matters: C corporation status is required to issue qualified small business stock, which can make gains on a sale tax-free up to a limit. Converting to or from C status has lasting tax consequences.

Note: US-specific.

A call right gives the company or another owner the right, but not the obligation, to require an owner to sell their shares at an agreed price or formula, usually after a set event such as leaving employment. It lets the family buy back shares from someone who should no longer hold them.

Why it matters: Call rights keep shares out of the hands of former employees, ex-spouses or departed family members. The price formula must be fair or the call can lead to a lawsuit.

A cap table is a spreadsheet listing every owner of a company, what type of shares or rights they hold, and their percentage ownership, including options and other rights to receive shares in the future. It shows who gets what in a sale.

Why it matters: Many family businesses have never kept an accurate cap table, and gaps surface painfully during a sale or dispute. Buyers will not close until it is correct.

A capital call is a request by a fund manager for investors to send part of the money they previously promised to invest. Investors in private equity and similar funds commit a total amount up front and pay it in over several years as deals are made.

Why it matters: Family offices must keep enough cash available to meet calls, which can arrive with little notice. Missing a call can lead to severe penalties under the fund's terms.

Capital expenditures are money spent on buildings, equipment, vehicles, technology and other long-lived assets. Maintenance capex keeps the business running at its current level; growth capex expands it.

Why it matters: Owners who delay equipment spending before a sale often see buyers reduce the price to cover the catch-up. High required capex lowers free cash flow and value.

Capital gains tax is the tax on the profit from selling an asset, such as a business, shares or real estate, for more than its tax cost (basis). In the US, assets held more than one year are taxed at lower long-term rates than ordinary income, and some high earners also owe a separate net investment income tax.

Why it matters: On the sale of a family business, the structure of the deal, the type of entity and the timing can change the capital gains bill significantly.

Note: US-specific rates and rules; state taxes also apply.

The capitalization of earnings method values a business by dividing one year of normal, expected earnings by a capitalization rate, which reflects risk minus expected long-term growth. It is common for stable small and midsize businesses.

Why it matters: It is simple, but only as good as the earnings figure chosen. Using a year with unusual results distorts the value.

Carried interest is the share of a fund's profits paid to the manager, commonly around 20 percent, usually only after investors get back their money plus a minimum return called the hurdle rate. In real estate it is often called the promote.

Why it matters: Carry rewards managers for performance but can encourage risk-taking. Family offices negotiating direct deals or co-GP roles can sometimes earn carry themselves.

Carryover basis means the person receiving a gift takes on the giver's original tax cost of the asset. If a parent gifts shares that cost almost nothing, the child's tax cost is also almost nothing, and the child pays capital gains tax on nearly the full value when selling.

Why it matters: Gifting low-cost business shares saves estate tax but can create a larger income tax bill later compared with inheriting them. Both taxes should be modeled before gifting.

Note: US-specific.

Cash-free debt-free is the most common basis for pricing a private company sale: the seller keeps the company's cash and pays off its debt at closing, and the buyer receives the business with a normal level of working capital. The headline price is therefore enterprise value, the value of the business itself.

Why it matters: Owners must subtract debt and add retained cash to understand what they will actually receive. Definitions of "debt" in the agreement can include items the seller did not expect, such as deferred revenue or unpaid bonuses.

Chair emeritus is an honorary title given to a retiring founder or chair who steps down from the formal role. It usually carries no vote or authority but keeps the person connected, sometimes with an advisory role and an office.

Why it matters: A respected title gives a founder a dignified role after stepping down, which makes letting go easier. The role should be defined in writing so it does not become a back channel for running the company.

A charitable lead trust is the reverse of a charitable remainder trust (which pays the family first and charity last): it pays a stream of money to charity for a set period, and then what remains goes to family members. It can move assets to heirs at a reduced gift or estate tax cost.

Why it matters: It combines family giving goals with wealth transfer, and works best when the IRS Section 7520 rate is low.

Note: US-specific. Legal review recommended.

A charitable remainder trust is an irrevocable trust (one that generally cannot be changed once signed) that pays income to the owner or family for life or a set number of years, then gives what remains to charity. Assets contributed, such as business shares before a sale, can be sold by the trust without immediate capital gains tax, and the owner receives a partial income tax deduction.

Why it matters: It can turn a highly appreciated asset into a stream of income while supporting charity. The family gives up the remainder, so it suits owners with real charitable goals.

Note: US-specific. Shares must be contributed before a sale is effectively agreed. Legal review recommended.

A chief investment officer is the person responsible for a family's investment strategy and portfolio: setting how money is spread across investment types, choosing managers and investments, and reporting results. In larger single family offices this is a full-time staff role.

Why it matters: The CIO's judgment and incentives shape the family's returns and risk. Pay plans that reward short-term results or asset growth can encourage the wrong behavior.

Closing is the moment a sale is completed: ownership transfers, the buyer pays and all final documents are signed. Signing and closing can happen on the same day or weeks apart when approvals, such as from lenders or regulators, are needed.

Why it matters: Between signing and closing, conditions in the purchase agreement can still let the buyer walk away. The deal is not done until it closes.

A club deal is an investment made by a group of investors, often several family offices, who pool money to buy a company or property together. The members share the research, legal costs and risk.

Why it matters: Clubs let family offices do larger deals than they could alone. Agreeing up front on who leads, how decisions are made and how to exit prevents disputes.

A co-CEO arrangement puts two people, often siblings, in the top role at the same time, each usually responsible for different parts of the business. It is sometimes used to avoid choosing between children.

Why it matters: Shared leadership works only when the two people trust each other and have a clear way to break ties. When chosen to avoid a hard decision, it often postpones conflict rather than preventing it.

A family code of conduct is a written set of behavior rules for family members, covering matters such as confidentiality, use of company property, social media, how family members treat employees and how disagreements are raised. It is usually part of the family constitution, the family's written rulebook.

Why it matters: A single family member's public behavior can damage the business's reputation with customers and employees. A code sets expectations before an incident rather than after.

A co-GP is an investor that shares the general partner role, meaning the managing and decision-making role, with another sponsor (the dealmaker leading the investment) in a deal or fund, contributing money and often expertise in return for a share of the fees and profit share. Family offices increasingly act as co-GPs alongside independent sponsors.

Why it matters: Acting as a co-GP gives a family office more say and more upside than a passive investment. It also brings more responsibility and risk.

A co-investment is an investment made alongside a fund manager or another investor in a specific deal, usually with lower fees than investing through the fund itself. The lead manager does most of the work and the co-investor adds money.

Why it matters: It lets a family increase exposure to deals it likes at lower cost. The family must be able to evaluate deals quickly, often in days.

Common stock is the basic form of company ownership. Common owners usually vote, receive dividends after anything owed to lenders and preferred owners, and get what is left after everyone else is paid in a sale or closure.

Why it matters: Common owners carry the most risk and get the most upside. When outside capital is added with preferred terms, family common owners move to the back of the line.

Comparable company analysis values a business by looking at the valuation multiples (price divided by earnings or revenue) of similar companies. For private businesses, appraisers adjust for differences in size, growth and risk because public companies usually trade at higher multiples.

Why it matters: It grounds valuation in real market data, but the choice of which companies count as comparable can change the answer significantly.

A confidential information memorandum is a detailed document, often 40 to 80 pages, describing a business for sale: its history, products, customers, management, financial results and growth opportunities. Buyers receive it after signing a confidentiality agreement.

Why it matters: It frames how buyers see the company and shapes the first price offers. Claims in it that later prove inaccurate damage trust during due diligence.

A confidentiality agreement is a contract in which a potential buyer promises not to share or misuse information about a business it is considering buying. It often also bars the buyer from hiring the seller's employees or contacting customers for a period of time.

Why it matters: Competitors who pose as buyers can learn pricing, customers and key people. A strong agreement, and releasing sensitive information in stages, reduces that risk.

A conflict of interest policy is a written rule requiring directors, managers and family members to disclose any personal interest in a company decision and to step out of the vote on it. It commonly covers side businesses, family members as vendors and personal loans from the company.

Why it matters: Undisclosed conflicts are one of the most common triggers of family lawsuits. A policy turns an accusation into a routine disclosure.

Consolidated reporting is combining information from all of a family's accounts, entities, advisors and investments into one set of reports that shows total wealth, performance, risk and cash flow. It is usually produced monthly or quarterly using specialized software.

Why it matters: Families with dozens of accounts and entities often do not know their true net worth or risk until reporting is consolidated. It is usually the first service a new family office sets up.

A consulting agreement is a contract under which the selling owner stays on after the sale for a set period, commonly six months to two years, to help transfer relationships and knowledge. The seller is paid a fee or salary for this work, separate from the purchase price.

Why it matters: Many sellers underestimate how hard it is to work for someone else in the company they built. The term, duties and authority should be clear.

A control premium is the extra amount a buyer will pay per share to acquire a controlling stake, because control brings the power to set strategy, pay and dividends and to sell the company. It is the opposite side of the minority discount, the lower per-share value given to a stake that lacks control.

Why it matters: The same shares can be worth more when sold together as a controlling block. Families splitting shares evenly among heirs can destroy control value that no one holds anymore.

The controlling owner stage is the first stage of family ownership, when one person, usually the founder or one heir, owns all or most of the business and makes the decisions. Governance is informal because one person has the final say.

Why it matters: It is the simplest stage but also the most fragile, because everything depends on one person. Planning for the move to shared ownership has to start here.

Corporate governance is the system that oversees the company itself: the board of directors (the group legally responsible for supervising management), the company's bylaws and the rules for approving major decisions. It answers who hires and fires the CEO, who approves budgets and large deals, and how management is held accountable.

Why it matters: In a family business, corporate governance keeps family emotions from driving business decisions. When the board and the family table are the same people at the same meeting, business problems and family problems get mixed together and neither gets solved.

Cost of capital is the return investors and lenders expect for putting money into a business, reflecting its risk. The weighted average cost of capital blends the interest rate on debt with the higher return expected by owners. It is used as the discount rate when valuing future cash flows.

Why it matters: A family business that measures projects against too low a cost of capital will approve investments that destroy value. Private family companies usually have a higher cost of capital than public ones because they are smaller and less diversified.

A cousin consortium is the ownership stage where shares are spread among many cousins from different family branches, usually from the third generation on. Most owners do not work in the business, and they often live in different places and have different financial needs.

Why it matters: At this stage the family needs formal governance, dividend rules and a way for owners to sell, because informal trust among cousins is thin. Without these, pressure to sell the business builds.

Covenants are conditions in a loan agreement the borrower must meet, such as keeping debt below a set multiple of EBITDA (cash operating profit), maintaining a minimum ability to cover loan payments, or getting lender approval before paying large dividends or making acquisitions. Breaking one can allow the lender to demand repayment.

Why it matters: Covenants can restrict what the family can take out of the business and when. Owners should know their covenant limits before promising distributions to family members.

A cross-purchase agreement is a type of buy-sell agreement (a contract governing buyouts of an owner's shares) where the remaining owners personally buy the departing owner's shares, rather than the company buying them. When funded with insurance, each owner typically owns a policy on the others.

Why it matters: The structure affects taxes for both the buyers and the estate of the departing owner. With many owners, the number of insurance policies needed grows quickly, which is why some families use a trust or a company redemption instead.

Note: US-specific tax consequences; confirm structure with a tax advisor.

A Crummey power is a temporary right given to trust beneficiaries to withdraw money added to a trust, usually for 30 days. It makes contributions to the trust count as present gifts, so they can qualify for the annual gift tax exclusion (the amount each person can give each recipient every year tax-free). It is named after a 1968 court case.

Why it matters: It lets families fund trusts, such as insurance trusts, using annual exclusions instead of lifetime exemption. Beneficiaries must actually be notified each time, and skipping notices can undo the benefit.

Note: US-specific.

A custodian is a financial institution, usually a bank or brokerage, that holds a family's securities and cash for safekeeping, processes trades and produces account statements. It is separate from the advisor who makes investment decisions.

Why it matters: Keeping assets at an independent custodian protects against advisor theft or fraud. Families should confirm their money is held in their own name at a custodian.

Customer concentration is when a large share of revenue comes from a few customers. Buyers often become concerned when a single customer is more than 10 to 20 percent of sales, though thresholds vary by industry.

Why it matters: Heavy concentration lowers valuation multiples and can lead buyers to demand earnouts tied to keeping the customer. Diversifying customers before a sale raises value.

A data room is a secure online folder where a seller places the documents buyers need for due diligence (the buyer's detailed investigation), such as financial statements, tax returns, contracts, leases and employee records. Access is tracked so the seller knows who looked at what.

Why it matters: A complete, well-organized data room speeds the deal and signals a well-run business. Documents added late tend to raise suspicion.

Deadlock is a situation where owners or directors are evenly split and no decision can be made, such as two siblings each owning 50 percent. Well-drafted agreements include a deadlock-breaking method, such as an outside tiebreaker, mediation or a buy-sell trigger.

Why it matters: A business that cannot make decisions loses value quickly, and deadlocks between equal owners are one of the most common reasons family companies end up in court. The fix must be written before the split happens.

Deal flow is the stream of investment opportunities a family office or investor sees. Its quality depends on the family's network, reputation and how much it is known as a reliable partner.

Why it matters: Families that invest directly succeed or fail largely based on the quality of deals they see. Most strong deals come through relationships rather than cold submissions.

The debt service coverage ratio measures whether a company earns enough to cover its loan payments. It is cash flow available for debt payments divided by the total principal and interest due in a year; a ratio of 1.25 means the company earns 25 percent more than its loan payments.

Why it matters: Banks use it to decide how much to lend and often write a minimum into the loan covenants. Falling below the minimum can trigger default.

The debt-to-EBITDA ratio is a company's total debt divided by its annual EBITDA (cash operating profit). A ratio of three means the company owes three years of cash operating profit. Lenders use it to set borrowing limits and covenants.

Why it matters: Higher ratios mean more risk in a downturn. Family businesses that historically avoided debt often have room to borrow for growth or a family buyout.

Decision rights are the written list of who is allowed to make which decisions: which ones the CEO makes alone, which need the board, which need a shareholder vote and which belong to the family council. A decision matrix usually lists dollar limits, such as spending above a set amount requiring board approval.

Why it matters: Unclear decision rights mean every decision escalates to the founder, and the successor never gets real authority. Clear rights let a founder step back without losing oversight.

Dilution is the reduction in an existing owner's percentage of a company when new shares are issued to someone else, such as an investor, employee or new family member. The owner holds the same number of shares but a smaller slice.

Why it matters: Dilution is not always bad if the new money grows the company enough, but family owners should understand how new issuances affect control and future payouts.

Direct investing is when a family office invests straight into private companies or real estate, rather than through a fund managed by someone else. It can be a minority stake or full ownership.

Why it matters: It avoids fund fees and gives more control, and it suits families with operating experience. It also requires skilled staff to find, evaluate and oversee deals, which many family offices underestimate.

A directed trust is a trust that splits duties among different people: for example, a trust company handles administration, a family member or investment committee directs the investments, and another person directs distributions. Several US states have laws that support this structure.

Why it matters: It lets a family keep the family business as a trust asset and have family members direct decisions about it, while a professional handles paperwork. Without it, a traditional trustee may feel obligated to sell a concentrated business stake.

Note: US-specific; state law varies.

Disclosure schedules are lists attached to the purchase agreement (the final sale contract) where the seller spells out exceptions to the representations and warranties (the seller's promised statements of fact about the business), such as a pending lawsuit or a contract that a customer can cancel. Anything properly disclosed usually cannot later be the basis of a claim.

Why it matters: Thorough disclosure is the seller's best protection against later claims. Hiding a known problem risks a fraud claim that is not limited by the usual caps.

A discount for lack of marketability is a reduction in the value of shares because they cannot be sold quickly or easily, unlike shares of a public company. Shares in a private family company, especially with transfer restrictions (rules limiting who can buy them), may be discounted meaningfully for this reason in a formal valuation.

Why it matters: The discount lowers the taxable value of gifts and inheritances of family business shares. The IRS challenges discounts it sees as excessive, so they must be supported by a qualified appraiser.

Note: US tax planning concept; size of discount is fact-specific and frequently challenged by the IRS. Legal review recommended.

Discounted cash flow is a valuation method that estimates the cash a business will generate in future years and converts it into today's value using a discount rate, which reflects the risk and the time value of money. The riskier the business, the higher the discount rate and the lower the value.

Why it matters: DCF values depend heavily on the forecast and the discount rate chosen, so two appraisers can reach very different numbers. Owners should ask what assumptions drive the result.

A discretionary account is an investment account where the family has given an advisor authority to buy and sell without asking permission for each trade, within limits set in writing. A nondiscretionary account requires approval for each trade.

Why it matters: Discretion allows faster action but requires trust and clear limits. The investment policy statement should define what the advisor may and may not do.

A dispute resolution clause is the section of a family or ownership agreement that sets out the steps for handling disagreements, typically direct conversation first, then the family council, then mediation (a neutral helper) and finally arbitration (a private binding decision). It sets deadlines for each step.

Why it matters: When the path is agreed in advance, a disagreement follows a process instead of becoming a feud. Families without one tend to go straight to lawyers.

A distribution policy sets the rules for paying money out to family members from an entity other than an operating company paying dividends, such as a family holding company, partnership or trust. It covers how much is paid, how often, for what purposes and under what conditions.

Why it matters: Clear rules prevent family members from treating shared wealth as an on-demand bank and protect the capital for future generations. Rules that are too tight can push family members to demand a breakup.

A dividend policy is a written rule for how much of the company's profit is paid out to owners each year and how much is kept in the business for growth, debt repayment or reserves. It might set a percentage of profit, a target dollar amount, or conditions such as meeting loan covenants first.

Why it matters: Disagreement over dividends is one of the most common causes of conflict between family members who work in the business and those who do not. A predictable written policy reduces suspicion and helps owners plan.

A dividend recapitalization is when a company borrows money and uses it to pay a large one-time dividend to its owners. Ownership does not change, but the company now carries more debt.

Why it matters: It lets owners take cash out without selling any shares, but the extra debt reduces the company's cushion in a downturn. Lenders will limit how much can be borrowed relative to EBITDA.

A donor-advised fund is an account at a public charity where a donor contributes money or assets, gets an immediate tax deduction, and then recommends grants to charities over time. The sponsoring charity has final legal control but usually follows the donor's recommendations.

Why it matters: It is a simpler, cheaper alternative to a private foundation for families that want to give together and involve children in grant decisions.

Note: US-specific.

A drag-along right lets the majority owners force the minority owners to sell their shares in a sale of the whole company, on the same price and terms. It ensures that a small holder cannot block a sale that most owners want.

Why it matters: Buyers usually want 100 percent of a company, so a single holdout family member can kill a deal without it. The minority is protected by getting the same price per share as everyone else.

Due diligence is the buyer's detailed investigation of a business before closing, covering financial records, contracts, legal issues, taxes, employees, customers, technology and environmental matters. It usually happens after the letter of intent (the buyer's written offer) is signed and can take 60 to 120 days.

Why it matters: Disorganized records, missing contracts and surprises found in diligence lead to price cuts or failed deals. Sellers who prepare in advance keep control of the timeline.

The duty of care is the obligation of a director or trustee to make decisions carefully: to be informed, read the materials, ask questions and act as a reasonable person would in the same role. It does not require every decision to turn out well, only that the process was careful.

Why it matters: Family directors who approve deals without reading them expose themselves to legal claims from other shareholders. Keeping minutes that show questions were asked is the practical protection.

The duty of loyalty is the obligation of a director or trustee to put the company's or the beneficiaries' interests ahead of their own. It forbids self-dealing, such as having the company lease a building you personally own on terms that favor you, unless it is disclosed and approved by people without a stake in it.

Why it matters: Family businesses are full of related-party deals, such as leases, loans and jobs, and each one is a potential loyalty claim from a family member who feels shortchanged. Clear approval rules prevent the claim.

A dynasty trust is an irrevocable trust (one that generally cannot be changed once signed) designed to last for many generations, sometimes indefinitely, holding assets for children, grandchildren and later descendants without estate or generation-skipping tax each time a generation passes. It is funded using the grantor's exemption from generation-skipping transfer tax, a separate federal tax on transfers to grandchildren and later generations.

Why it matters: A dynasty trust can keep a family business or its sale proceeds protected from estate taxes, creditors and divorces for generations. Its duration depends on the state where it is based, since some states limit how long a trust can last.

Note: US-specific. State law on trust duration varies. Legal review recommended.

An earnout is a part of the sale price paid later only if the business hits agreed targets after closing, such as revenue or EBITDA (cash operating profit) goals over one to three years. It is often used when buyer and seller disagree about the value of future growth.

Why it matters: Earnouts frequently pay less than sellers expect, because the buyer now controls the decisions that drive the results. Sellers should negotiate clear definitions, protections against the buyer changing the business to avoid payment, and simple, measurable targets.

EBITDA stands for earnings before interest, taxes, depreciation and amortization. It is a company's profit before subtracting interest on debt, income taxes, and depreciation and amortization (accounting charges that spread the cost of equipment, buildings and purchased intangibles over several years). Buyers use it as a rough measure of the cash profit the business produces from operations.

Why it matters: Most private company sale prices are quoted as a multiple of EBITDA, so every dollar of EBITDA can be worth several dollars of price. It ignores the cost of replacing equipment, so a business that needs heavy spending to keep running is worth less than its EBITDA suggests.

An embedded family office is one run from inside the family's operating business, often by the company's CFO, accountants or assistants, who handle the family's personal finances alongside their company jobs. There is often no separate entity or budget for this work.

Why it matters: It is common and convenient but mixes family and company money, can raise tax problems and creates confusion for nonfamily shareholders or buyers. Many families separate it out before a sale or when more family members become owners.

An emergency succession plan is a short document stating who takes over immediately if the leader suddenly dies or becomes unable to work, who can sign checks and contracts, and who tells employees, banks and customers. It is a temporary plan for the first days and months, separate from the long-term succession plan.

Why it matters: Banks can freeze accounts and customers can leave within weeks if no one has authority after a sudden death. A few pages written in advance prevent that.

Emotional ownership is the sense of attachment, pride and responsibility a family member feels toward the business, separate from how many shares they legally own. Family members can have strong emotional ownership with no shares, or shares with no emotional ownership.

Why it matters: Owners with emotional ownership support long-term decisions and resist selling. Building it in the next generation, through involvement and education, is often more important than the share transfer itself.

Enterprise value is the value of the whole business, regardless of how it is financed with debt or owners' money. Headline sale prices are usually quoted as enterprise value. What the owners actually receive, called equity value, is enterprise value minus debt, plus cash, and adjusted for working capital.

Why it matters: Owners who hear an enterprise value of 30 million dollars and expect a check of 30 million are often surprised after debt, fees and adjustments are subtracted. Always ask what the equity proceeds will be.

Entitlement is the belief that one deserves money, jobs or privileges because of family background rather than effort. In wealthy families it can show up as heirs expecting a job, a large salary or an inheritance without contributing.

Why it matters: Entitled heirs can damage the business, drain family wealth and drive away capable nonfamily employees. Clear rules, real work and financial education are the common antidotes.

An equity incentive plan gives key employees a share in the company's growth through stock, stock options, profits interests or cash plans that track the stock's value. Awards usually vest, meaning they are earned over several years of service.

Why it matters: Family businesses often lose top nonfamily managers because they cannot share in the value they help create. A plan can keep them without giving away real control.

Equity value is the portion of a company's value that belongs to the owners after debt is repaid and cash is added. Put simply: enterprise value (the value of the whole business), minus debt, plus cash, plus or minus any working capital adjustment.

Why it matters: It is closer to what owners actually receive before taxes and deal fees. Owners should compare offers on equity value, not headline price.

An escrow is a portion of the sale price held by a neutral third party, usually a bank, for a set period after closing to cover possible claims by the buyer. If no claims arise, the money is released to the seller when the period ends.

Why it matters: Escrows delay part of the seller's payment and may never be fully paid out. Sellers negotiate the size, length and release conditions as hard as the price.

An ESOP is a US retirement plan that owns company stock on behalf of employees. The owner sells shares to a trust set up for the plan, often financed by a bank loan or a seller note (a loan from the selling owner), and employees earn ownership over time without paying for it themselves.

Why it matters: An ESOP can let an owner sell at fair market value, keep the business independent and reward employees, with significant potential tax benefits. It is heavily regulated, costs money to administer each year and usually pays less than a strategic buyer would.

Note: US-specific; governed by federal retirement law and tax rules. Legal review recommended.

An estate freeze is any strategy that locks the value of an owner's interest in a business at today's value, so that future growth goes to heirs rather than increasing the owner's taxable estate. Common methods include selling shares to a family trust for a note, recapitalizing into preferred and common shares, or using a GRAT.

Why it matters: For a growing business, freezing value early can save significant estate tax. The owner must keep enough income and control to live comfortably after the freeze.

Note: US freeze techniques are subject to special valuation rules in Chapter 14 of the Internal Revenue Code; other countries, such as Canada, use different freeze rules. Legal review recommended.

An estate plan is the set of legal documents and arrangements that decide who receives a person's assets, including business shares, when they die, who manages things if they become unable to, and how to reduce taxes and court involvement. It typically includes a will, one or more trusts, powers of attorney and beneficiary designations on accounts and insurance.

Why it matters: For a business owner, the estate plan and the business's ownership agreements must say the same thing, or the shares may end up with the wrong person. Plans more than a few years old often do not reflect current tax law or family circumstances.

Estate tax is a tax on the value of everything a person owns at death above an exemption amount, paid by the estate before heirs receive their shares. The US federal top rate is 40 percent, and some states charge their own estate or inheritance tax with lower exemptions.

Why it matters: A family whose wealth is mostly in a private business may owe a large tax bill with no cash to pay it, forcing a sale. Planning, life insurance and payment deferral options exist to prevent this.

Note: US-specific. Per IRS, the federal basic exclusion is 15,000,000 dollars per person for 2026 (checked September 2026). State rules differ.

An exclusivity period is a set length of time, commonly 45 to 90 days, during which a seller agrees not to talk to or negotiate with other buyers while the chosen buyer does its detailed investigation. It is usually a binding part of the letter of intent.

Why it matters: Once exclusive, the seller loses competitive pressure, and a buyer may use the time to find reasons to lower the price. Keeping the period short and tied to milestones protects the seller.

Exit planning is the process of preparing both the owner and the business for the owner's eventual departure, whether by passing it to family, selling to managers, selling to an outside buyer or closing it. It covers the owner's personal financial needs, the business's value and readiness, taxes, and what the owner will do afterward.

Why it matters: Owners who plan an exit three to five years ahead usually have more options and get better terms than those forced out by health or burnout. The plan also shows whether the owner can afford to leave.

Fair market value is the price a willing buyer would pay a willing seller for an asset when neither is forced to act and both know the relevant facts. It is the standard used by the IRS for estate and gift taxes, and it assumes a hypothetical buyer, not a specific one.

Why it matters: Fair market value for tax purposes often includes discounts for minority stakes and lack of marketability, so it can be far below what a strategic buyer would pay. That gap is the basis of many estate planning strategies.

Note: US tax standard defined in Treasury regulations.

Fair value is a legal standard of value used in many US states when a court must set the price for a minority shareholder's shares, such as in dissent or oppression cases. It often does not apply the minority and marketability discounts used in fair market value. The same term also has a separate accounting meaning.

Why it matters: The same shares can be worth very different amounts under fair value and fair market value. Buy-sell agreements should state which standard applies.

Note: US-specific; definitions vary by state. Legal review recommended.

Fair vs equal is the dilemma parents face in passing on a business: giving every child the same share (equal) versus giving more control or value to the child who works in and builds the business (fair, in some views). Many families give the business to active children and other assets or insurance to the rest, or split value equally while concentrating voting control.

Why it matters: Equal ownership among children with very different roles often leads to conflict, while unequal splits can be seen as favoritism. Explaining the reasoning while the parents are alive reduces the damage.

A family assembly is a meeting open to all adult family members, and sometimes spouses and teenagers, usually held once or twice a year. It is where the family receives updates on the business and wealth, elects the family council, approves major family policies and spends time together. Its purpose is information and connection more than detailed decision-making.

Why it matters: Family members who are never informed start to assume the worst about those who are. A regular assembly keeps inactive owners, meaning those who do not work in the business, loyal and informed.

A family bank is a formal program, often run by a family office or family trust, that lends or invests family money into family members' businesses, home purchases or education on written terms. It usually has an application process, a review committee and repayment rules.

Why it matters: It turns handouts into accountable investments and teaches the rising generation how capital works. Without written rules, loans to relatives often become disguised gifts and cause resentment among siblings.

A family branch is the group of descendants of one member of an earlier generation, for example all the children and grandchildren of one of the founder's three children. Ownership and governance seats are often divided by branch.

Why it matters: Branch-based voting and representation can protect smaller branches, but they can also make every decision a contest between branches. Many families shift over time from branch representation to choosing people for skills.

A family business is a company where one family holds enough ownership to control major decisions and intends to keep that control, often across generations. Researchers use dozens of different definitions, some based on ownership percentage, some on family members in management and some on the intention to pass the company on. A family business can be a small shop or a large public company.

Why it matters: The definition matters because most widely quoted statistics about family businesses use different definitions and cannot be compared. An owner reading a statistic should check which definition was used.

The family business life cycle describes how a family business changes as it moves through generations: ownership shifts from a founder to siblings to cousins, the business grows from startup to maturity, and the family grows from a young couple to many branches. Researchers Kelin Gersick, John Davis, Marion McCollom Hampton and Ivan Lansberg described these stages in their 1997 book Generation to Generation.

Why it matters: Each stage needs different rules; what worked for a founder rarely works for 30 cousins. Knowing which stage the family is in helps it choose the right governance.

Family capital describes all the resources a family has, not only money. Frameworks used by advisors such as James Hughes divide it into financial capital and several nonfinancial forms, commonly human capital (each person's skills and health), intellectual capital (knowledge), social capital (relationships and community ties) and spiritual or values capital.

Why it matters: Families that invest only in financial capital often lose it, because heirs lack the skills and relationships to manage it. Tracking nonfinancial capital gives families a broader goal than growing the balance.

A family champion is a family member, often informally recognized, who keeps the family connected and engaged: organizing meetings, pushing governance forward and helping relatives communicate. In many families this role has historically fallen to a mother or grandmother without a title.

Why it matters: Governance efforts often stall without someone who cares enough to push them. Recognizing and supporting the role, sometimes as family council chair, makes it last beyond one person.

A family charter is a written statement of a family's history, values and shared goals, along with the basic rules it agrees to follow as owners. Many advisors use "charter" and "constitution" to mean the same thing; others use "charter" for a shorter, values-focused document and "constitution" for a longer rulebook. The family should decide which it means and say so in writing.

Why it matters: A short charter is often the first governance step a family actually completes, which gives it momentum. Confusion over what the charter covers leads to arguments about whether a rule was ever agreed.

A family compensation policy sets how family members who work in the business are paid, usually at market rates for the actual job, separate from any returns they receive as owners. It makes clear that salary is for work and dividends are for ownership.

Why it matters: Mixing pay and ownership returns is one of the biggest sources of resentment between family members who work in the business and those who do not. Market-rate pay also gives a true picture of the company's profit.

Family conflict in a business setting is disagreement among relatives about the business, ownership, money or roles that spills into family relationships. Common triggers include succession choices, pay, dividends, in-laws and unequal treatment.

Why it matters: Unresolved conflict is one of the leading reasons family businesses are sold or fail. Governance, written policies and outside help address conflict before it becomes litigation.

A family constitution is a written document that records a family's values, its vision for the business and wealth, and the rules the family agrees to follow. It usually covers who counts as family, how family members may join or leave ownership, employment rules, how the family council is chosen and how disputes are resolved. Most constitutions are not legally binding on their own; the binding pieces are placed in legal documents such as the shareholders agreement (the contract among owners).

Why it matters: Writing it forces the family to discuss hard questions, such as in-laws, pay and succession, while everyone is calm. A constitution that conflicts with the legal documents creates confusion over which one controls.

A family council is a small elected or appointed group of family members that represents the whole family on matters where family and business overlap. It typically writes and updates family policies (such as rules on who may work in the business), plans family meetings, runs education for younger members and speaks to the company board with one voice. It does not run the company.

Why it matters: Once a family grows past a handful of people, it cannot make decisions as a full group, and a council keeps decisions from defaulting to whoever is loudest. A council that drifts into managing the business undermines the CEO and the board.

A family education program is a planned series of learning for family members of all ages, covering topics such as reading financial statements, how the business works, the role of a shareholder, investing, philanthropy and communication. It is usually run by the family council or family office.

Why it matters: Educated owners make better decisions and are less likely to be misled or to fight over things they do not understand. It also keeps younger members connected to the business.

A family employment policy is a written set of rules on whether and how family members can work in the business. It typically covers required education and outside work experience, whether there must be a real open job, how family members are paid and reviewed, who they report to and how they can be let go.

Why it matters: It replaces emotional one-off decisions with rules agreed in advance, which protects both family relationships and the business. Families without one often hire relatives who cannot be managed or fired.

A family enterprise is the full set of businesses, real estate, investments, philanthropy and shared assets that a family owns together, not only the original company. Many families start with one business and, over generations, grow into a family enterprise with a holding company (a company that owns the other companies) or family office (a private organization that manages the family's wealth) at the center.

Why it matters: Thinking in terms of the enterprise rather than the single business helps families plan for life after a sale. It also changes what successors need to learn.

A family enterprise advisor is a professional who works on the family side of a family business: governance, succession, communication and conflict. They come from backgrounds such as law, accounting, psychology or management consulting, and some hold credentials from bodies such as the Family Firm Institute or Family Enterprise Canada. They usually work alongside the family's lawyers and accountants rather than replacing them.

Why it matters: Technical advisors can draft documents but often cannot get a family to agree on what should go in them. The right process advisor can.

Family governance is the set of written rules, meetings and decision-making groups a family uses to manage its shared relationship with a business or shared wealth. It covers who decides what, how family members are informed, how disagreements are handled and how the next generation is prepared. It is separate from running the company day to day, which is management's job.

Why it matters: Families that set rules before a crisis make hard decisions with far less damage to relationships. Families without governance tend to make ownership and employment decisions under emotional pressure, often at a funeral or during a divorce.

A family limited partnership is a partnership, or sometimes an LLC, that holds family assets such as business shares, real estate or investments, with parents usually controlling it as general partner (the partner who manages it) and gifting limited partnership interests, which carry little control, to children. The gifted interests are often valued at a discount because they lack control and cannot be easily sold.

Why it matters: It can centralize management, protect assets and reduce gift and estate taxes. The IRS closely examines these entities and has won cases where families used them for personal expenses or had no business reason.

Note: US-specific. Must be operated with proper formalities and a legitimate non-tax purpose. Legal review recommended.

A family meeting is a scheduled gathering where family members discuss matters that touch both the family and the business, following an agenda. Smaller families often start with family meetings long before they create a formal family council. Good meetings have a facilitator, written notes and clear separation between information sharing and decisions.

Why it matters: Regular meetings bring problems up while they are small and teach younger members how the business works. Families that only meet when something is wrong come to associate family meetings with conflict.

A family mission statement is a short written statement of why the family stays together as owners and what it wants to accomplish over generations. It is often one paragraph and sits at the front of the family constitution, the family's written rulebook.

Why it matters: A clear purpose gives later generations a reason to stay owners together beyond the money. Without one, cousins who never knew the founder have little reason not to sell.

A family narrative is the story a family tells about where its wealth and business came from, what sacrifices were made and what the family stands for. It is often written down, recorded or told at family gatherings.

Why it matters: Later generations who never met the founder need the story to understand why the business is worth keeping. Families that tell it regularly tend to have stronger commitment among heirs.

A family office is a private organization that manages the investments and financial affairs of a wealthy family. Depending on its size and design, it may handle investing, tax, accounting, estate planning coordination, insurance, philanthropy, family education, bill paying and household or travel management. There are several types, including single family offices, multi-family offices, virtual family offices and offices embedded inside the operating business.

Why it matters: As wealth and family complexity grow, coordinating advisors and investments without a central office leads to missed opportunities, duplicated fees and gaps in oversight. After a business sale, a family office often becomes the new center of the family enterprise.

A family office budget is the annual cost of running a family office, including salaries, rent, technology, outside advisors, insurance and compliance. Families often compare it to total assets as a percentage to judge whether the office is efficient.

Why it matters: Costs that look small in one year compound over decades. A clear budget and cost-sharing rules among family members prevent disputes over who pays for what.

The family office exclusion is a US Securities and Exchange Commission rule that lets a family office avoid registering as an investment adviser if it serves only one family and its related people and entities, is owned and controlled by family members and does not hold itself out to the public as an adviser. Family is defined broadly and includes certain former spouses, key employees and family trusts.

Why it matters: Serving outside clients, even friends, or taking on non-family investors can cause a single family office to lose the exclusion and face registration and compliance costs. Structure changes should be checked against the rule first.

Note: US-specific; adopted by the SEC in 2011. Legal review recommended.

Family philanthropy is charitable giving done together as a family, through a private foundation (a charity the family controls), a donor-advised fund (a giving account held at a public charity) or direct gifts, with family members involved in choosing causes and grants. It often includes the next generation in decision-making from a young age.

Why it matters: Shared giving gives family members who do not work in the business a meaningful role and teaches budgeting, decision-making and teamwork in a lower-stakes setting.

A family retreat is a meeting of one to three days held away from the office where the family combines business updates, education, planning and social time. Retreats often use an outside facilitator. They are common places to draft or revise a family constitution, the family's written rulebook.

Why it matters: Time away from the office makes it easier to discuss sensitive topics like succession and to build the relationships that carry a family through hard decisions. A retreat that is all business and no connection tends to lose attendance over time.

A family values statement is a written list of the principles the family agrees should guide its behavior as owners, employers and members of the community, such as honesty, hard work or humility. Some families write separate statements for family values and business values.

Why it matters: Written values give the family a reference point in disputes, such as whether a family member's conduct is acceptable. Values that are never applied to real decisions become decoration.

A fiduciary duty is a legal obligation to act in someone else's best interest rather than your own. Directors owe it to the company and its shareholders, trustees owe it to the beneficiaries of a trust (the people the trust is meant to benefit), and some financial advisors owe it to clients. The two core parts are the duty of care and the duty of loyalty.

Why it matters: A family member who sits on a board or serves as trustee can be personally sued for breaching these duties, for example by favoring their own branch of the family. Knowing the duty exists changes how those roles are filled.

Note: Rules vary by state and by type of entity; specific duties should be confirmed with counsel.

A financial buyer is an investor, such as a private equity firm, family office or search fund (an individual who raises money to buy and run one company), that buys a business as an investment to grow and later sell, rather than to combine with its own operations. Returns come from growth, debt paydown and a higher sale price later.

Why it matters: Financial buyers usually keep the business intact and often want management and sometimes the family to stay, but they plan to sell again, typically within three to seven years.

Financial literacy is the ability to understand and manage money: budgeting, saving, reading financial statements, understanding debt, taxes and investments. For heirs of business families it also includes understanding company financials and their responsibilities as owners.

Why it matters: Heirs who receive wealth without these skills are more likely to lose it. Teaching them early, with real but limited money at stake, builds judgment.

A formula price is a method written into a buy-sell agreement for setting the price of shares, such as a multiple of earnings, book value (the accounting value on the balance sheet) or a fixed agreed value updated each year. Alternatives include requiring a new independent appraisal at the time of the trigger event.

Why it matters: Formulas are simple but go stale as the business changes, and fixed values are often never updated. A stale price can transfer large amounts of wealth unfairly between family branches.

Founder's syndrome describes a company that depends so heavily on its founder that decisions, relationships and knowledge all run through one person, and the founder resists sharing control. It is a pattern observed by advisors, not a medical condition.

Why it matters: A business that cannot run without its founder is worth less to buyers and is fragile when the founder leaves. Reducing dependence on the founder raises the company's value and makes succession possible.

The four-room model is a framework that divides family business decisions into four separate settings: the owner room, the board room, the management room and the family room. Each room has its own members, its own agenda and its own decisions. The idea is to discuss each issue in the right room so that, for example, a family argument is not settled in a management meeting.

Why it matters: Most family business conflict comes from having the right conversation in the wrong room. The model gives families simple language to redirect a discussion.

Free cash flow is the cash a business has left after paying operating costs, taxes, and spending on equipment and other long-term assets needed to keep running and growing. It is the money truly available to pay lenders, owners or reinvest.

Why it matters: A company can show strong EBITDA (cash operating profit before interest, taxes and equipment costs) and still have little free cash flow if it must buy expensive equipment every year. Buyers and lenders care most about free cash flow.

G1, G2 and G3 are shorthand for the generations of a family business. G1 is the founding generation, G2 is the founder's children, G3 is the grandchildren, who are often cousins from different family branches, and so on.

Why it matters: The label signals which stage of ownership the family is in and what problems to expect. A G3 business typically has many more owners, most of whom do not work in it.

The general partner is the manager of a fund or partnership that makes the investment decisions and runs its operations. In return it typically receives a management fee and carried interest, a share of the profits.

Why it matters: The general partner's incentives shape how the fund behaves. Family offices increasingly take general partner roles themselves in individual deals.

The generation-skipping transfer tax is a US federal tax on gifts and inheritances that skip a generation, such as from grandparent to grandchild, or to a trust for them. It is charged in addition to estate or gift tax, at the top estate tax rate. Each person has a lifetime exemption from it, which the IRS set at 15 million dollars for 2026.

Why it matters: Without planning, wealth passed to grandchildren can be taxed twice. Using the GST exemption on assets expected to grow, such as business shares in a dynasty trust, protects the growth for generations.

Note: US-specific. Per IRS (Rev. Proc. 2025-32, checked September 2026), GST exemption for 2026 is 15,000,000 dollars, indexed for inflation after 2026. Unlike the estate exemption, GST exemption is not portable between spouses. Legal review recommended.

A genogram is a family tree diagram that also shows relationships and roles: marriages, divorces, who works in the business, who owns shares and which relationships are close or strained. Family business advisors use it to understand a family before planning.

Why it matters: It makes the ownership and relationship picture visible to everyone at once, which often reveals issues, such as a branch with no future owners, that no one had discussed.

Gift tax is a US federal tax on transfers of money or property to another person without full payment in return. It shares a single lifetime exemption with the estate tax, so taxable gifts during life use up exemption that would otherwise shelter assets at death. Gifts up to the annual exclusion amount per recipient do not count.

Why it matters: Gifting business shares early, while their value is low, moves future growth out of the estate. Gifts above the annual exclusion require filing a gift tax return even when no tax is owed.

Note: US-specific.

Goodwill is the part of a business's value above the value of its physical and identifiable assets, reflecting reputation, customer relationships, workforce and brand. Personal goodwill belongs to the owner personally, such as relationships tied to them, while enterprise goodwill belongs to the company.

Why it matters: In some US asset sales, selling personal goodwill separately can reduce taxes, but only with strong facts and documentation. Buyers pay more for enterprise goodwill because it stays when the owner leaves.

Note: Personal goodwill tax planning is US-specific and fact-dependent. Legal review recommended.

The grantor is the person who creates a trust and puts assets into it. The trust document the grantor signs sets the rules the trustee must follow.

Why it matters: Depending on how the trust is written, the grantor may still be taxed on the trust's income even though the assets are out of their estate. That choice drives several major planning strategies.

A grantor retained annuity trust is an irrevocable trust (one that generally cannot be changed once signed) into which an owner places assets, such as business shares, and receives fixed annual payments back for a set number of years. Whatever the assets earn above an IRS-set interest rate (the Section 7520 rate) passes to the heirs at the end of the term with little or no gift tax. Many GRATs are designed so the taxable gift at creation is close to zero.

Why it matters: GRATs work best with assets expected to grow quickly, such as shares in a company before a sale or a growth period. If the owner dies during the term, most of the assets are pulled back into the taxable estate, so shorter terms are common.

Note: US-specific. GRATs are poorly suited to generation-skipping planning because GST exemption generally cannot be allocated until the term ends. Legal review recommended.

A grantor trust is a trust whose income is taxed to the grantor, the person who created it, rather than to the trust, because of powers the grantor keeps under the tax code. A trust can be a grantor trust for income tax while still being outside the grantor's estate for estate tax.

Why it matters: When the grantor pays the trust's income tax, the trust grows untaxed, which acts as an extra tax-free gift to the heirs. It also allows sales between the grantor and the trust without triggering capital gains tax.

Note: US-specific.

A gross revenue royalty is a financing arrangement where an investor provides money in exchange for a fixed percentage of the company's future revenue (total sales, before expenses) until a set total amount is repaid or for a set period. The investor does not take ownership or board seats.

Why it matters: It lets a family raise capital without giving up equity or control, and payments rise and fall with sales. Because it is taken from top-line sales rather than profit, it can be expensive for businesses with thin margins.

Growth capital is money invested in a company to fund expansion, such as new locations, equipment, acquisitions or hiring, rather than to buy out existing owners. It can come as debt, preferred equity (ownership paid before common owners) or a minority stake sold to an investor.

Why it matters: Family businesses often grow only as fast as retained profits allow. Outside growth capital can speed growth, but each type brings different costs, control terms and repayment pressure.

An heir is a person who receives property or ownership from someone who has died, either through a will, a trust or the law of the state if there is no will. In family business discussion the word is often used loosely for any child expected to inherit ownership.

Why it matters: Being an heir to ownership is not the same as being qualified to lead. Families that mix the two ideas often end up with owners in management roles they are not suited for.

High-net-worth is an industry label for individuals or families with substantial investable wealth, commonly defined as at least 1 million US dollars in liquid investments. Firms use different definitions, and the label has no legal meaning.

Why it matters: Many services for families below the ultra-high-net-worth level come from private banks and wealth managers rather than family offices.

A holdback is a portion of the purchase price that the buyer keeps, rather than paying into escrow with a third party, until certain conditions are met or a claims period ends. It serves the same protective purpose as an escrow.

Why it matters: With a holdback, the buyer controls the money, which makes it harder for the seller to collect if there is a dispute. Sellers usually prefer a third-party escrow.

A holding company is a company whose main job is owning other companies or assets, such as the operating business, real estate and investments, rather than producing goods or services itself. Families often place their assets under one holding company so they can be governed and passed down together.

Why it matters: A holding company can simplify ownership transfers and let the family diversify beyond the original business. It also adds legal and tax complexity that needs to be managed.

Human capital is the knowledge, skills, health, character and abilities of each family member. In family wealth planning, it is treated as the family's most important asset, because it determines whether the financial capital will be managed well.

Why it matters: A family that grows its money but not its people eventually has more wealth than it can manage. Spending on education and development is an investment, not a cost.

A hurdle rate is the minimum annual return investors must receive before the manager earns any carried interest (profit share). In many funds it is set around 8 percent a year, though terms vary.

Why it matters: The hurdle protects investors from paying profit share on mediocre results. Family offices also use internal hurdle rates to decide which investments are worth making.

An inactive family member is a family owner or relative who does not work in the business. In later generations they usually outnumber the family members who do.

Why it matters: Inactive owners mostly care about dividends, information and fair treatment; ignoring them leads to pressure to sell or to lawsuits. Good governance gives them a voice without letting them manage the company.

Indemnification is a promise in the purchase agreement that the seller will repay the buyer for losses caused by specific problems, such as false representations (untrue statements of fact the seller made in the sale contract), unpaid pre-sale taxes or certain lawsuits. The agreement sets limits on how much, for how long and after what minimum amount the seller must pay.

Why it matters: Indemnification decides how much of the sale price the seller can lose after closing. The cap, the basket and the survival period are worth as much negotiation as the headline price.

An indemnity basket is a minimum threshold of losses that must be reached before the buyer can claim anything from the seller. A deductible basket means the seller pays only losses above the threshold; a tipping basket means once the threshold is passed, the seller pays from the first dollar.

Why it matters: The basket keeps small disputes from eating into the seller's proceeds. The difference between a deductible and a tipping basket can be significant.

An indemnity cap is the maximum amount a seller can be required to pay the buyer for breaches of representations and warranties (untrue statements of fact the seller made in the sale contract) after the sale. It is usually a percentage of the purchase price, with certain fundamental items such as ownership of the shares or taxes often capped higher or at the full price.

Why it matters: The cap sets the seller's worst-case loss. A low cap is one of the most valuable terms a seller can win.

An independent director is a board member who is not a family member, not an employee and not paid by the company for other services such as legal or accounting work. The point is that this person can disagree with the family or the CEO without risking a job, a client relationship or a family relationship.

Why it matters: Independent directors are often the only people in the room who can tell a founder that a child is not ready to lead. Choosing friends or the company's own lawyer defeats the purpose.

An independent sponsor is a dealmaker, often a former private equity professional, who finds and negotiates the purchase of a company without having a committed fund. After signing a deal, they raise money from investors such as family offices for that single transaction.

Why it matters: Independent sponsors are often more flexible on structure and more interested in smaller family businesses, but their ability to close depends on raising money after the letter of intent. Sellers should ask who has committed capital.

An indication of interest is an early, non-binding statement from a potential buyer giving a price range and rough terms, submitted after reading initial information about a business. The seller's advisor uses these to decide which buyers move forward in the process.

Why it matters: It lets a seller compare many buyers before granting anyone exclusive access. A wide price range in an indication often narrows downward later.

An individual development plan is a written plan for one person's growth, listing the skills they need, the jobs and training that will build them, a mentor and dates for review. In family businesses it is used for every family member working in the company, not only the chosen successor.

Why it matters: It turns vague expectations into measurable steps and gives family members honest feedback they rarely get from a parent. It also creates a record if the family later needs to explain why someone was or was not promoted.

An in-law policy is a family's written rules on the role of spouses and partners: whether they can work in the business, attend family meetings, serve on the family council, receive information or own shares. It often links to requirements for prenuptial agreements.

Why it matters: Unclear roles for in-laws cause hurt feelings and conflict, and shares that pass to a spouse through divorce or death can leave the family. Writing the policy before there is a specific person involved keeps it from feeling personal.

An installment sale is a sale where the buyer pays over several years rather than all at closing, which lets the seller generally report the taxable gain as payments are received instead of all at once. Families use it for sales to children, to management or to trusts.

Why it matters: Spreading the gain can lower the seller's tax and makes it easier for a family buyer to afford the purchase. The seller carries the risk of nonpayment.

Note: US-specific tax rules; related-party resale rules apply. Confirm with a tax advisor.

An intentionally defective grantor trust is an irrevocable trust (one that generally cannot be changed once signed) drafted so its assets are outside the owner's estate for estate tax purposes, while the owner still pays the trust's income tax. The "defect" is deliberate. A common use is for the owner to sell business shares to the trust in exchange for a promissory note, which freezes the value in the owner's estate and moves future growth to heirs.

Why it matters: Because sales between the owner and the trust are ignored for income tax, no capital gains tax is due on the sale, and the owner's payment of the trust's taxes further reduces the estate. Assets in the trust generally do not get a step-up in basis at the owner's death, which should be weighed against the estate tax savings.

Note: US-specific. IRS Revenue Ruling 2023-2 states that assets in such a trust that are not included in the grantor's estate do not receive a basis step-up at death. Legal review recommended.

An interim CEO is a leader who runs the company for a defined period, often one to five years, while a permanent successor is developed or found. The interim leader may be a senior executive, a board member or an outside hire.

Why it matters: A bridge leader prevents the family from rushing an unready successor into the top job. The interim role needs a defined end date and clear goals, or it turns into a permanent arrangement nobody chose.

An intrafamily loan is a loan from one family member, or a family trust, to another, documented with a written note, interest and a repayment schedule. In the US, the interest rate must generally be at least the applicable federal rate, a minimum rate published monthly by the IRS, to avoid being treated partly as a gift.

Why it matters: Properly documented family loans can move growth to the next generation with little tax cost. Undocumented loans that are never repaid can be treated as taxable gifts.

Note: US-specific.

An investment banker, in the context of selling a private company, is an advisor who runs the sale process: prepares materials, finds and contacts buyers, manages offers and negotiates terms. They are usually paid mostly through a success fee, a percentage of the sale price paid at closing, plus sometimes a monthly retainer.

Why it matters: A good banker typically more than earns the fee through competition and better terms. Owners should check the banker's recent deals in their size range and industry.

Note: In the US, firms receiving transaction-based pay for selling securities generally must be registered broker-dealers, subject to certain exemptions.

An investment committee is a group of family members, family office staff and often outside experts that reviews and approves investment decisions, sets the investment policy and oversees managers and advisors. It usually meets quarterly and keeps written minutes.

Why it matters: It spreads decisions beyond one person and gives the rising generation a place to learn. Committees without clear authority tend to delay decisions.

An investment policy statement is a written document that sets a family's investment goals, how much risk it will accept, how money will be spread across types of investments, how often it will be reviewed, how cash needs will be met and who can make which decisions. It guides anyone managing the family's money.

Why it matters: It keeps investment decisions consistent through market swings and staff changes, and it keeps family members from chasing hot ideas. It is also the standard against which advisors are measured.

Investment value is what a specific buyer would pay for a business based on that buyer's own situation, such as cost savings from combining operations, access to new customers or tax benefits. For a strategic buyer (an operating company in the same or a related business), it is usually higher than fair market value, the price a typical hypothetical buyer would pay.

Why it matters: The best sale prices come from buyers who can pay investment value. Running a process that reaches those buyers is often worth more than negotiating hard with one.

An irrevocable life insurance trust is a trust created to own life insurance on a person, so that the death benefit is paid to the trust and kept outside that person's taxable estate. The proceeds can provide cash to pay estate taxes, buy out shares or provide for heirs who do not receive the business.

Why it matters: Insurance owned personally is usually included in the taxable estate, which can shrink its value to heirs. An ILIT is a common way to give heirs cash without selling the business.

Note: US-specific. Transferring an existing policy into a trust can be pulled back into the estate if death occurs within three years.

An irrevocable trust is a trust that generally cannot be changed or cancelled once created, and the person who funds it gives up ownership and control of the assets put into it. Because the assets are no longer the creator's, they are usually outside that person's taxable estate.

Why it matters: Irrevocable trusts are the main tool for moving business growth out of an owner's estate and protecting assets from creditors and divorce. The loss of control is real, so owners should be sure before funding one.

Note: Some states allow modification through decanting or court action; confirm with counsel.

A junior board is a group of younger family members, and sometimes young nonfamily employees, who meet to study the business, review real issues and make recommendations to the actual board. It works as a training ground for future directors and owners.

Why it matters: It gives the rising generation real exposure to how decisions are made years before they carry any legal responsibility. It also shows the senior generation who is interested and capable.

Key person insurance is a life or disability insurance policy that a company buys on an owner or critical employee, with the company as the beneficiary. If that person dies or becomes disabled, the payout helps the company cover lost profit, recruit a replacement or reassure lenders.

Why it matters: It buys time for the company to survive the loss of a founder or top performer. Lenders sometimes require it as a loan condition.

Key person risk is the danger that the business will suffer serious losses if one specific person, often the owner or top salesperson, leaves, becomes ill or dies. It shows up when a few people hold most customer relationships, technical knowledge or decision authority.

Why it matters: Buyers and lenders lower their price or add conditions when they see heavy key person risk. It can be reduced by building a management team and insured with key person insurance.

Knowledge transfer is passing on what the current leader knows that is not written down: customer relationships, supplier history, how prices are set, where problems usually come from and why past decisions were made. It is done through shadowing, joint meetings, documentation and gradual handoff of relationships.

Why it matters: Much of a founder-led company's value lives in the founder's head. If it is not passed on before the founder leaves, the successor and any buyer inherit a weaker business.

Leadership succession is the handoff of the top management role, usually the CEO or president, from one person to the next. The new leader may be a family member or a nonfamily executive. It is separate from ownership succession (the transfer of shares), and the two often happen on different timelines.

Why it matters: Families that treat leadership and ownership as the same question often give control of the company to a child simply because that child inherits shares. Separating them allows the best leader to run the business while the whole family keeps ownership.

Legacy is what a family or founder leaves behind beyond money: the business, its reputation, the family's values, its role in the community and the stories later generations tell. In family business planning, it usually refers to what the family wants to be remembered for and passed on.

Why it matters: A shared sense of legacy is often the main reason later generations keep a business instead of selling it. A legacy defined only by the founder, without input from heirs, may not be one they want to carry.

A letter of intent is a short document, usually a few pages, in which a buyer sets out the proposed price, structure and main terms for buying a business. Most of it is not legally binding, but it usually contains binding sections on confidentiality and an exclusivity period, a set time during which the seller agrees not to negotiate with other buyers.

Why it matters: The seller's negotiating power is highest before the letter of intent is signed and drops sharply afterward. Terms left vague in the letter, such as the working capital target or escrow size, are usually settled later in the buyer's favor.

Letting go is the process by which a founder or senior leader gives up day-to-day control of the business to a successor. It involves handing over decisions, relationships and information, and it is often emotionally hard because the business is tied to the founder's identity and purpose.

Why it matters: Many succession plans fail not because the successor is weak but because the founder will not step aside. A founder with a clear next role, such as board chair, investor or philanthropist, lets go more successfully.

A leveraged buyout is the purchase of a company paid for mostly with borrowed money, with the company's own cash flow used to repay the debt afterward. Private equity firms and many management buyouts use this structure.

Why it matters: The heavy debt load means the company has less room for error. Sellers keeping rollover equity or a seller note in a highly indebted company are taking real risk.

The lifetime exemption is the total amount a US person can give away during life and at death combined before federal gift or estate tax is owed. Gifts beyond the annual exclusion reduce what is left for use at death.

Why it matters: Families with a valuable business often use the exemption on shares during life, when values are lower, so later growth escapes estate tax. Congress can change the amount, so plans should be reviewed after any tax law change.

Note: US-specific. Per IRS and the One Big Beautiful Bill Act (signed July 4, 2025), the basic exclusion is 15,000,000 dollars per person for 2026, indexed for inflation after 2026, with no scheduled sunset (checked September 2026).

A limited liability company is a type of legal entity that protects its owners from being personally responsible for the company's debts, while allowing flexible rules on management and profit sharing. By default in the US it is taxed as a pass-through entity, meaning profits are taxed on the owners' personal returns rather than at the company level.

Why it matters: LLCs are widely used for family holding entities and real estate because the operating agreement can be tailored to family rules. The wrong entity choice can cost a family tax benefits later, for example in a sale.

Note: US-specific entity; tax classification can be changed by election.

A limited partner is an investor in a fund or partnership who provides money but does not manage it, and whose losses are generally limited to the amount invested. Family offices are often limited partners in private equity, venture and real estate funds.

Why it matters: Limited partners have little control once they commit, so the choice of manager and terms at the start is what matters.

A liquidation preference is the right of certain investors, usually preferred owners, to get their money back, and sometimes a multiple of it, before common owners receive anything when the company is sold or wound down. It is written into the investment documents.

Why it matters: A company can sell for a large headline price and the family common owners can still receive little if investors hold large preferences. Owners should model the payout at different sale prices before signing.

A liquidity event is a transaction that turns an ownership stake into cash, such as selling the business, selling part of it to an investor, a recapitalization or a public offering. It may happen all at once or in stages.

Why it matters: A large liquidity event changes the family from business owners to investors overnight. Planning for taxes, investing and family roles before the event avoids rushed decisions after it.

Liquidity planning is making sure a family has enough cash or easily sold assets to cover living costs, taxes, capital calls (requests from funds for promised money), loan payments and opportunities, without being forced to sell investments at a bad time. It usually involves a cash forecast covering the next one to three years.

Why it matters: Families rich on paper but holding mostly private assets can face cash crunches when estate taxes come due or fund calls arrive. Planning prevents forced sales.

A majority recapitalization is a transaction where an investor, usually private equity, buys more than half of the company and the family keeps a meaningful minority stake, often 10 to 40 percent, through rollover equity (reinvesting part of the proceeds). The family typically stays in management for a time.

Why it matters: The family gets most of its money now and a second payout if the investor sells the company later for more, but gives up control. Family members who stay on often find the new owner's pace and priorities very different.

A majority shareholder is an owner, or a group acting together, that holds more than half of the voting shares and can elect the board and decide most company matters. Some decisions may still require a higher vote under the company's agreements.

Why it matters: Control has real value, which is why buyers pay more per share for a controlling stake. A controlling owner also carries the legal risk of treating minority owners unfairly.

A management buyout is the sale of a company to its existing managers, usually financed by a mix of bank debt, a seller note (a loan from the seller) and sometimes an outside investor. It is a common exit when there is no family successor.

Why it matters: Managers know the business and culture, which protects employees and legacy. They rarely have enough money of their own, so the seller often carries part of the price and the risk.

A management fee is the yearly fee a fund manager charges investors to cover operating costs, commonly between 1 and 2 percent of committed or invested money for private funds. It is charged whether or not the fund makes a profit.

Why it matters: Over a 10-year fund, fees add up to a significant share of returns. Family offices doing direct deals often cite avoiding these fees as a reason to invest directly.

Married-in is a term for a person who joined a business-owning family through marriage or partnership rather than birth. Married-ins often bring outside perspective but may have unclear roles and influence.

Why it matters: Married-ins shape the values and attitudes of the next generation at home, so including them in family education builds support for the business. Excluding them entirely often breeds resentment.

A material adverse change clause lets a buyer walk away from a signed deal before closing if something seriously harmful happens to the business in the meantime. What counts is defined in the purchase agreement (the final sale contract), often with exceptions for industry-wide or economic events.

Why it matters: A broadly written clause gives the buyer an exit or a lever to renegotiate. Sellers narrow it and shorten the time between signing and closing.

Mediation is a process where a neutral outside person, the mediator, helps people in a dispute talk through the problem and reach their own agreement. The mediator cannot impose a decision. It is private, usually faster and far cheaper than a lawsuit.

Why it matters: Family business disputes that go to court become public and usually end relationships permanently. Requiring mediation first in the family's agreements keeps most disputes out of court.

Mentoring is a relationship in which an experienced person advises and develops a less experienced one over time. In family businesses the most useful mentor for a successor is often a nonfamily executive or outside business owner rather than the parent.

Why it matters: Parents have trouble giving honest feedback to their own children, and children have trouble hearing it. A nonfamily mentor can say what the parent cannot.

A meritocracy is a system in which people are hired, promoted and chosen as successors based on ability and performance rather than family status, birth order or gender. In a family business it usually means family members must meet the same standards as outside candidates.

Why it matters: Nonfamily employees stay and perform when they believe the best people advance. A family that claims to be merit-based but always promotes family members loses its best outsiders.

Mezzanine debt is a loan that ranks behind senior debt, meaning it is repaid only after the bank if the company fails, but ahead of the owners. Because it is riskier for the lender, it carries a higher interest rate and often includes warrants, the right to buy a small amount of company stock.

Why it matters: Mezzanine can fund a buyout, acquisition or family redemption without selling control. It is expensive, and the warrants give away a slice of future growth.

A minority discount is a reduction in the value of an ownership stake because it does not control the company. A holder of 20 percent cannot set dividends, choose management or force a sale, so a buyer would pay less per share than for a controlling stake.

Why it matters: Minority discounts can substantially lower the value of gifted shares for gift and estate tax purposes. The same discount can feel unfair to a family member being bought out at that value.

Note: US tax planning concept; subject to IRS scrutiny.

A minority recapitalization is a transaction where an outside investor, often a private equity firm or family office, buys less than half of a company, giving the family cash and sometimes growth money while the family keeps control. The investor usually receives protections such as board seats, approval rights over major decisions and a path to exit.

Why it matters: It lets a family take some money off the table or buy out a sibling without selling the whole company. The investor's exit rights, often within five to seven years, can force a later sale if not negotiated carefully.

A minority shareholder is an owner who holds less than half the voting shares and cannot control the company's decisions alone. In family businesses, siblings and cousins who do not work in the business are often minority shareholders.

Why it matters: Minority owners often feel shut out of decisions and dividends, which is a leading cause of family disputes. Their shares are also valued lower, per share, than controlling shares.

A multi-family office is a firm that provides family office services to many unrelated families, sharing staff and systems across them. Some began as a single family office that opened to other families; others are founded as commercial firms or are owned by banks.

Why it matters: It gives families access to family office services at lower cost than running their own, with less control and less privacy. Families should understand how the firm is paid and whether it sells its own investment products.

A negotiated sale is when a seller deals with only one buyer, often one who approached the owner directly, without running a competitive process. It is faster and more private.

Why it matters: Without competition, the seller has little way to know whether the price is fair. Many buyers seek these deals specifically to avoid paying competitive prices.

Nepotism is giving jobs, promotions or pay to relatives because they are family rather than because they earned them. Hiring family members is not nepotism in itself; it becomes nepotism when family members are held to lower standards than others.

Why it matters: Perceived nepotism drives away talented nonfamily employees and weakens the business. Written employment and pay rules protect both the family and the company.

A nepotism policy is a written rule on how relatives, of both owners and employees, can be hired, supervised and promoted. It commonly bans family members from directly supervising or setting the pay of their own relatives. In family businesses it is often combined with the family employment policy.

Why it matters: It reassures nonfamily employees that decisions affecting them are fair. Without it, every family hire invites suspicion.

Net asset value is the current market value of everything a company owns minus everything it owes. It is the main valuation method for holding companies, real estate companies and investment entities, where value comes from assets rather than operating profit.

Why it matters: Family holding companies and family limited partnerships are usually valued starting from net asset value, then discounted for lack of control and marketability.

Next generation refers to the children and younger relatives of the current owners who may one day own, lead or benefit from the family business and wealth. The term covers everyone in that generation, not only those who will work in the business.

Why it matters: Preparing the whole next generation, including those who will be owners but not employees, prevents a split between insiders and outsiders later. Families that focus only on the chosen successor often neglect future shareholders.

A non-compete agreement is a promise by the seller not to start or work for a competing business for a set time and area after the sale. It is often paired with promises not to recruit employees or solicit customers.

Why it matters: Buyers will not pay for goodwill (customer relationships and reputation) that the seller can take away the next day. Enforceability varies by state and is generally stronger in the sale of a business than in ordinary employment.

Note: Enforceability is state-specific and has been subject to federal regulatory activity; confirm with counsel.

A nonfamily CEO is a chief executive who is not a member of the owning family. Families bring one in when no family member is ready or interested, as a bridge until a family member is ready, or as a permanent choice while the family stays involved as owners and board members.

Why it matters: A good nonfamily CEO can grow the business while the family keeps ownership, but the arrangement fails if family members go around the CEO to give orders to staff. Clear decision rights and a working board are what make it last.

Working capital is a company's short-term assets, such as receivables (money customers owe) and inventory, minus its short-term bills, such as payables to suppliers. Normalized working capital is the typical level a business needs to operate, usually measured as an average over the prior 12 months.

Why it matters: It is the basis for the working capital peg in a sale. Owners who collect receivables aggressively or let inventory run down just before closing usually find the price adjusted downward.

An operating agreement is the contract among the owners of a limited liability company (LLC, a common business entity that protects owners from company debts). It sets out who owns what percentage, who manages the company, how profits are divided, how decisions are made and what happens when an owner wants out, dies or divorces.

Why it matters: For an LLC, the operating agreement does the work of both bylaws and a shareholders agreement. A generic template leaves the family exposed on transfers to in-laws and on how an exiting owner is paid.

An operating company is the business that actually makes and sells products or services and has employees and customers. It is often owned by a holding company, with real estate and other assets held in separate companies.

Why it matters: Keeping real estate and investments outside the operating company protects them from the business's lawsuits and debts and makes a future sale of the business simpler.

An outside work experience requirement is a family rule that family members must work a set number of years, often three to five, at another company before joining the family business. Some families also require a promotion earned elsewhere.

Why it matters: Outside experience gives family members proof they can succeed without family backing, which builds credibility with employees. It also brings in outside methods and shows the individual whether they actually want the family business.

An outsourced CIO is an outside firm hired to act as a family's chief investment officer, managing the investment portfolio, often with authority to make decisions without asking each time. That authority is limited by an investment policy statement, the family's written investment rules.

Why it matters: It gives a family institutional-level investment management without hiring an in-house team. Fees and conflicts, such as the firm recommending its own funds, need careful review.

Owner readiness is how prepared an owner is, financially and emotionally, to leave the business. Financial readiness means having enough money outside the business to live on; emotional readiness means having a sense of identity and purpose beyond the company.

Why it matters: Owners who are financially ready but emotionally unready often back out of sales late in the process, which wastes time and money and can damage the business. Assessing both early avoids that.

An owners council is a group made up of the shareholders of a family business, or people chosen to represent them, that agrees on what the owners want from the company. It sets owner expectations such as acceptable risk, how much profit should be paid out versus reinvested, and whether the business should ever be sold, and communicates those to the board. It is separate from the family council because not every family member is an owner.

Why it matters: Boards work better when owners speak with one voice about goals instead of lobbying directors one by one. Without an owners forum, disagreements among shareholders leak into management.

Ownership succession is the transfer of shares in the business from one generation or owner to the next, through gifts, sales, trusts or inheritance. It decides who will hold the value and the votes, which may be different people from those who run the company.

Why it matters: Ownership decisions have large tax consequences and are hard to reverse, so they need years of planning with lawyers and accountants. Splitting shares equally among children who do and do not work in the business is a common source of later conflict.

The parallel planning process is a method, described by family business researchers Randel Carlock and John Ward, in which a family plans its family goals and its business strategy at the same time and lines them up with each other. For example, a plan to grow aggressively must match the family's willingness to reinvest profits rather than take them out.

Why it matters: A business strategy that the owners will not fund, or a family plan that the business cannot support, fails. Planning both together exposes the mismatch early.

A pass-through entity is a business whose profits are not taxed at the company level but are reported on the owners' personal tax returns, whether or not the cash is actually paid out. Partnerships, most LLCs and S corporations are pass-through entities in the US.

Why it matters: Owners can owe tax on profits they never received in cash, which is why many pass-through companies make tax distributions (payments to cover owners' tax bills). A family that skips these payments creates hardship for minority owners.

Note: US-specific.

Patient capital is investment money with no fixed deadline to sell, such as capital from a family office or an evergreen fund (a fund with no set end date). The investor is willing to wait many years for returns.

Why it matters: Family businesses selling a stake often prefer patient investors who will not force a sale in five years. Family offices use their own patient capital as a selling point when competing with private equity for deals.

A personal guarantee is a promise by an owner to repay a company's loan from their own assets if the company cannot. Banks often require one from owners of private companies.

Why it matters: A guarantee puts the family's personal wealth at risk for the business's debts. Removing guarantees is a key goal when a business grows or when ownership passes to the next generation.

Phantom stock is a promise by the company to pay an employee cash equal to the value of a set number of shares, or the growth in that value, at a future date or on a sale. The employee never actually owns shares or votes.

Why it matters: It rewards key nonfamily managers like owners without adding anyone to the ownership, which families that want to keep ownership in the family find useful. The payout is taxed as regular income and is a real cost to the company.

A platform company is the first business an investor buys in an industry, intended as the base for adding smaller companies over time. Later purchases, called add-on acquisitions, are merged into it.

Why it matters: A family business that fits as a platform can command a higher price than one bought as a small add-on. Knowing which role a buyer sees for the company helps in negotiation.

Portability is a US rule that lets a surviving spouse use the unused estate and gift tax exemption of a spouse who died, if the executor makes the election on a timely filed estate tax return. The unused amount is called the deceased spousal unused exclusion.

Why it matters: Families sometimes skip filing an estate tax return when no tax is due at the first death and lose the unused exemption permanently. Portability does not apply to the generation-skipping transfer tax exemption.

Note: US-specific.

A power of attorney is a legal document that gives another person, the agent, authority to act on someone's behalf in financial or legal matters. A durable power of attorney stays in effect if the person becomes mentally incapacitated.

Why it matters: Without one, if an owner has a stroke or dementia, the family may need a court to appoint a guardian before anyone can sign for the owner's shares or accounts.

Precedent transactions analysis values a business by looking at the prices paid in past sales of similar companies, expressed as multiples of earnings or revenue. It reflects what buyers have actually paid for control of comparable businesses.

Why it matters: It is often the most persuasive evidence of value in a sale negotiation. Data on private deals is limited, so the sample may be small or out of date.

Preferred equity is a class of ownership that gets paid before regular (common) owners, both in dividends and if the company is sold or closed. It often carries a fixed annual return and limited voting rights. Investors use it to take less risk than common owners while still sharing some upside.

Why it matters: It can bring in capital without giving up control, but the fixed return must be paid before family owners see a dollar. In a weak sale, preferred holders can take most of the proceeds.

A prenuptial agreement is a contract signed by a couple before marriage stating how property will be divided if they divorce or one dies. Families often require that family business shares be kept as separate property of the family member. A postnuptial agreement does the same after marriage.

Why it matters: Divorce is one of the most common ways family business shares leave the family. A prenup, paired with transfer restrictions in the shareholders agreement, is the main protection.

Note: Enforceability requirements vary by state and country. Legal review recommended.

Primogeniture is the tradition of passing leadership or ownership to the firstborn child, historically the eldest son. Some family businesses still follow it, formally or by habit, instead of choosing the successor based on ability and interest.

Why it matters: Choosing by birth order avoids a competition among siblings but can put the wrong person in charge and push capable daughters or younger children out. Most modern family governance replaces it with written selection criteria.

Private credit is lending by investment funds and other nonbank lenders directly to companies, rather than by traditional banks. It often funds buyouts, acquisitions and refinancings that banks will not do.

Why it matters: Private credit lenders move faster and lend more than banks but charge more. Family offices also invest in private credit as a source of income.

Private equity refers to investment firms that raise money from investors such as pension funds and wealthy families into funds, then buy stakes in private companies, usually controlling ones, aiming to grow them and sell within about three to seven years. They typically use a mix of their fund's money and borrowed money.

Why it matters: Private equity is one of the most active buyers of family businesses. It can bring capital and professional management, but its fixed holding period and focus on returns differ sharply from a family's long horizon.

A private foundation is a charitable organization funded and controlled by a family, which makes grants or runs charitable programs. It must pay out a minimum percentage of its assets each year, file public tax returns and follow strict rules against dealings with family members.

Why it matters: A foundation gives a family a lasting shared purpose and a place for relatives to work together beyond the business. The self-dealing rules are strict, and violations carry penalties.

Note: US-specific rules; the annual minimum payout is generally 5 percent of assets.

A private trust company is a trust company created and owned by one family to act as trustee of the family's trusts, instead of using a bank or individual trustee. It is usually governed by a board that includes family members and outside professionals.

Why it matters: It keeps trustee decisions, such as whether to keep the family business in trust, in family hands while providing continuity when individual trustees die. It is costly and subject to state regulation.

Note: US-specific state regulation varies. Legal review recommended.

Pro forma financials show what a company's results would have looked like if a change had already happened, such as an acquisition, a new owner's salary or a cost cut. The Latin phrase means "as a matter of form". Sellers and buyers both use them to explain what the business will earn going forward.

Why it matters: Pro forma numbers help explain value but are estimates, not facts. Buyers and lenders test each assumption behind them.

Probate is the court process that confirms a will, pays debts and taxes, and distributes a deceased person's property. It can take months or years and in the US most probate filings are public record.

Why it matters: A business stuck in probate may have no one with clear authority to sign contracts or make decisions. Holding shares in a trust generally avoids probate for those shares.

Note: Rules and costs vary by US state.

A profits interest is a type of ownership in an LLC or partnership that entitles the holder only to a share of future growth and profits after the date it is granted, not to existing value. It is commonly used to reward managers.

Why it matters: When structured properly it can be granted without immediate tax to the recipient, and it gives managers real ownership in growth. The documents are technical and must be drafted by counsel.

Note: US-specific tax treatment; legal review recommended.

Pruning the family tree means buying out some family owners so ownership is concentrated among those most committed to the business. It is often done through a company buyback or a sale among family members.

Why it matters: Consolidating ownership can reduce conflict and speed decisions, and it gives departing owners cash. It must be done at a fair price and on good terms, or it creates lasting resentment among the departing branch.

The purchase agreement is the final, legally binding contract for the sale of a business. It sets the price and how it is paid, the representations and warranties (statements of fact the seller promises are true), the indemnification rules (who pays if those statements are wrong), the conditions for closing and what each side must do before and after.

Why it matters: The letter of intent is a handshake; the purchase agreement decides what the seller actually keeps. Most money lost after closing traces back to its fine print.

A purchase price adjustment is a change to the sale price after closing based on the actual final figures for items such as working capital, cash and debt. Estimates are used at closing, then trued up, typically within 60 to 120 days.

Why it matters: Adjustments can move money in either direction, and disputes are common. The agreement should define the accounting rules and name an independent accountant to settle disagreements.

A put right gives an owner the right, but not the obligation, to require the company or another owner to buy their shares at an agreed price or formula, usually after a set date or event. It is a way for a minority owner to guarantee a path to cash.

Why it matters: Put rights give inactive family owners and outside investors a way out, but a put that is exercised when the company is short of cash can strain the business. The funding must be planned.

A qualified appraisal is a written valuation prepared by a qualified appraiser meeting IRS standards, used to support the value reported for gifts, estate tax and certain charitable donations. Appraisers of businesses often hold credentials such as ASA (Accredited Senior Appraiser), ABV (Accredited in Business Valuation) or CVA (Certified Valuation Analyst).

Why it matters: A gift or estate return backed by a proper appraisal is much harder for the IRS to challenge. A weak appraisal can lead to added tax, interest and penalties years later.

Note: US-specific requirements under IRS rules.

A qualified purchaser is a higher US investor standard than accredited investor (the basic SEC test for investing in private deals), based mainly on the amount of investments a person, family company or trust owns. Many large private funds accept only qualified purchasers.

Why it matters: Meeting the standard opens access to more private funds. Family entities can qualify on special terms, which is one reason families pool investments.

Note: US-specific; defined in the Investment Company Act of 1940. Verify current thresholds.

Qualified small business stock is stock in a US C corporation (a standard corporation taxed at the company level) that meets certain size and business-type tests and was acquired directly from the company. When sold after the required holding period, some or all of the gain can be excluded from federal income tax, up to a per-company limit. Many service businesses, such as law, health, consulting and finance, do not qualify.

Why it matters: For founders and early investors in qualifying companies, QSBS can make millions of dollars of sale gain federally tax-free. The rules are technical and the benefit is easily lost through the wrong entity choice or redemptions.

Note: US-specific (Internal Revenue Code Section 1202). For stock acquired after July 4, 2025, the One Big Beautiful Bill Act allows a 50 percent exclusion after 3 years, 75 percent after 4 years and 100 percent after 5 years, with a per-issuer cap of the greater of 15,000,000 dollars or 10 times basis, and a 75,000,000 dollar gross asset limit for the company. Stock acquired earlier keeps the prior rules (5-year hold, 10,000,000 dollar cap, 50,000,000 dollar asset limit). Sources: Crowell and Moring, Greenberg Traurig client alerts, July 2025. State treatment varies. Legal review recommended.

A quality of earnings report is an in-depth review by an accounting firm of a company's reported profit, testing whether the earnings are real, recurring and properly recorded. It examines revenue, adjustments to EBITDA, working capital (short-term assets minus short-term bills), customer concentration and accounting practices. Buyers almost always commission one, and sellers increasingly order their own before going to market.

Why it matters: The buyer's QoE is where many prices get cut after the letter of intent is signed. A seller-side QoE finds the problems first, when the seller still has time to fix or explain them.

Rebalancing is periodically selling investments that have grown beyond their target share of a portfolio and buying those below target, to bring the portfolio back to the agreed asset allocation. Asset allocation is the planned split of money among types of investments.

Why it matters: It forces a discipline of selling high and buying low and keeps risk from drifting. Private investments cannot be rebalanced easily, which should be planned for.

A recapitalization is any change in how a company's ownership and debt are structured. In family business estate planning it often means splitting existing shares into voting and nonvoting shares. In deal making it means selling part of the company to an investor or borrowing to pay owners, covered separately as minority and majority recapitalizations.

Why it matters: The word means different things to an estate lawyer and an investment banker, so owners should ask which kind is meant. Both kinds change who controls the company.

Recurring revenue is income a company can expect to receive again and again, such as service contracts, subscriptions or long-term supply agreements, rather than one-time sales. Buyers value it more highly because it is more predictable.

Why it matters: Converting one-time customers to contracts is one of the clearest ways to raise the multiple a buyer will pay.

Refinancing is replacing existing debt with new debt, usually to get a lower interest rate, a longer repayment period, looser conditions or extra cash. A company might refinance a bank loan to free up money for an acquisition or to buy out a family member.

Why it matters: Good timing on refinancing can lower costs and fund a family transition without selling equity. Taking out too much cash in a refinancing leaves the company exposed in a downturn.

A registered investment adviser is a firm registered with the US Securities and Exchange Commission or a state regulator to give investment advice for a fee. RIAs owe clients a fiduciary duty, meaning a legal obligation to act in the client's best interest.

Why it matters: Families should know whether each advisor is a fiduciary or a salesperson paid by commissions. Many multi-family offices are RIAs; most single family offices are exempt from registering.

Note: US-specific.

A related-party transaction is any deal between the company and one of its owners, directors, managers or their relatives, such as a family member leasing land to the company or the company lending money to an owner. These deals are legal but must be priced fairly and approved by people without a personal stake.

Why it matters: Buyers and lenders look closely at these deals during a sale or refinancing, and above-market rent paid to a family member reduces the company's reported profit. Inactive owners often see them as the active family members helping themselves.

Representations and warranties are statements of fact the seller makes in the purchase agreement (the final sale contract) about the business, such as that the financial statements are accurate, taxes are paid, there are no undisclosed lawsuits and key contracts are valid. If a statement proves false, the buyer may be able to recover money from the seller.

Why it matters: Every representation is a promise the seller can be sued over later. Sellers limit risk by listing known exceptions in disclosure schedules and negotiating caps and time limits.

Reps and warranties insurance is an insurance policy, usually bought by the buyer, that pays for losses caused by inaccurate representations and warranties (the seller's statements of fact about the business) in the purchase agreement (the final sale contract). It lets the buyer claim against the insurer instead of the seller for most breaches.

Why it matters: It can shrink the seller's escrow and personal liability substantially, which matters to families who want a clean exit. Policies exclude known issues and some categories of risk.

Reserved matters are the list of decisions that management and the board cannot make alone and that require approval from shareholders, often by a supermajority (a higher threshold than a simple majority, such as two thirds or 75 percent). Typical examples are selling the company, taking on large debt, issuing new shares or changing the dividend policy (the rule for how much profit is paid out).

Why it matters: Reserved matters protect minority owners, those holding less than half, from being overruled on decisions that change what they own. Investors buying a minority stake almost always ask for them.

A retirement age policy is a family or company rule setting the age at which family executives or directors step down from their roles, such as 65 or 70. It is often written into the family constitution, the family's written rulebook.

Why it matters: A preset age turns a painful personal conversation into following a rule everyone agreed to earlier. Without one, many founders stay until a health crisis forces the change.

A retrade is when a buyer tries to lower the price or worsen the terms after the letter of intent (the buyer's written offer) has been signed, usually citing issues found during due diligence (the buyer's detailed investigation). Some retrades reflect real problems; others are negotiating tactics.

Why it matters: Sellers who have already told employees or mentally committed to the sale are vulnerable. Preparing with a seller-side quality of earnings review reduces the openings for a retrade.

Revenue-based financing is a loan repaid through a fixed share of monthly revenue until the lender receives a set multiple of the original amount, such as 1.3 to 2 times. Payments shrink in slow months and grow in strong months.

Why it matters: It is faster and more flexible than bank debt and does not dilute ownership, but the effective cost can be high if the business grows quickly and repays in a short time.

A revocable living trust is a trust a person creates during life, can change or cancel at any time and usually manages themselves as trustee. At death or incapacity, a successor trustee takes over and distributes or holds the assets according to the trust's terms without going through probate.

Why it matters: It keeps business shares out of probate and provides a ready manager if the owner becomes incapacitated. It does not reduce estate tax on its own, because the owner still controls the assets.

A revolving line of credit is a loan limit a company can draw on, repay and draw on again, like a business credit card with lower rates. It is usually used to cover seasonal cash needs and short-term working capital.

Why it matters: A line of credit is the cushion that keeps a company from missing payroll in a slow month. Using it to fund long-term purchases can leave the company short when it is needed.

A right of first offer requires an owner who wants to sell to first offer the shares to the company or other owners, who can make a bid. If they decline or bid too low, the seller may then sell to an outsider, usually only at a price at least as high as the insiders offered.

Why it matters: It is friendlier to the selling owner than a right of first refusal because outside buyers are not discouraged by the risk of being matched later. It still gives the family the first chance to buy.

A right of first refusal gives the company or the other owners the right to match any outside offer an owner receives before the owner can sell to that outsider. If they match, they buy the shares on the same terms; if they pass, the owner can sell to the outsider.

Why it matters: It is the main tool for keeping shares inside the family. It can also discourage outside buyers, who do not want to spend money on an offer that may simply be matched.

Rising generation is a term used by many family advisors, including author James Hughes, for younger family members, chosen to stress that they are growing into their own identities and roles rather than simply waiting to take over. It is often used in place of "next generation" to put the focus on individual development.

Why it matters: Treating younger members as people with their own goals, not only as heirs, increases the chance they choose to stay engaged. Heirs who feel their lives were decided for them often disengage or rebel.

Rollover equity is the portion of a seller's ownership that the seller reinvests in the buyer's new company as part of a sale, instead of taking all cash. For example, an owner might receive 75 percent of the price in cash and keep a 25 percent stake in the new owner's company.

Why it matters: Rollover gives the seller a second chance to profit if the buyer grows the company, but that stake is now a minority position controlled by someone else. Structured correctly, the rolled portion can often be done without immediate tax.

Note: US-specific tax deferral depends on deal structure; confirm with a tax advisor.

Run rate is a projection of a full year's revenue or profit based on a shorter recent period, such as multiplying the last quarter by four. Sellers use it to show recent growth.

Why it matters: Buyers discount run-rate figures that are not supported by contracts or a consistent trend. Pricing a deal on run rate rather than actual trailing results is a point of negotiation.

An S corporation is a US corporation that has elected a tax status where profits and losses pass through to the owners' personal tax returns instead of being taxed at the company level. It has strict rules: limits on the number and type of shareholders and only one class of stock, although voting and nonvoting shares are allowed.

Why it matters: Many family businesses are S corporations, and transferring shares to the wrong kind of trust or owner can accidentally end the status, with large tax costs. Estate planning must be designed around these rules.

Note: US-specific. Legal and tax review recommended before any share transfer to a trust.

A sale-leaseback is when a company sells real estate it owns, such as its plant or headquarters, to an investor and signs a long-term lease to keep using it. The company turns a building into cash while staying in place.

Why it matters: It can fund growth or a family buyout without new debt or selling equity. The company gives up future appreciation and takes on a long rent obligation.

An SBA 7(a) loan is a bank loan partially guaranteed by the US Small Business Administration, a federal agency, which lets banks lend to small businesses on longer terms and with lower down payments than they otherwise would. It is widely used to finance purchases of small businesses, including sales to employees or family members.

Why it matters: It can make a buyer of a smaller family business possible where a conventional loan would not work. The program has size limits, rules on seller financing and personal guarantee requirements that change over time.

Note: US-specific. Loan limits and seller-note rules are set by SBA regulations and change; verify current rules before relying on them.

A search fund is a vehicle in which one or two individuals, often recent business school graduates, raise money from investors to spend up to two years looking for a single company to buy and then run as CEO. After finding a company, the searcher raises more money for the purchase.

Why it matters: Search funds offer family owners a buyer who will personally run and care for the business, but the new CEO may have limited operating experience. Seller notes and transition periods are common in these deals.

Section 2032A is a US estate tax provision that lets qualifying family farms and closely held business real estate be valued for estate tax on their current use, such as farming, instead of their highest possible market value, such as development land. The reduction is capped and the heirs must keep using the property the same way for a set period.

Why it matters: For farming and ranching families near growing cities, it can significantly reduce estate tax. Selling or changing the property's use too soon triggers repayment of the tax saved.

Note: US-specific. Legal review recommended.

A Section 338(h)(10) election is a US tax choice that lets the purchase of shares in certain corporations, including S corporations, be treated as an asset purchase for tax purposes. The buyer gets the tax benefits of buying assets while the legal transfer happens as a stock sale, a purchase of the owners' shares.

Why it matters: It can bridge the conflict between a buyer who wants an asset sale and a seller who wants a stock sale, but it may increase the seller's taxes, so sellers usually ask to be compensated for that cost.

Note: US-specific. Legal and tax review recommended.

Section 6166 is a US tax provision that lets an estate pay the estate tax owed on a closely held business in installments over as long as about 14 years, with interest, instead of all at once, if the business makes up a large enough share of the estate. The estate can pay interest only for the first years.

Why it matters: It can prevent a forced sale of the family business to pay estate taxes. The eligibility tests are technical, and selling or withdrawing too much from the business can speed up the payments.

Note: US-specific. The business must exceed 35 percent of the adjusted gross estate. Legal review recommended.

The Section 7520 rate is an interest rate published monthly by the IRS and used to value annuities, remainder interests and similar arrangements for gift and estate tax. It is the return an asset must beat inside a GRAT or charitable trust for the strategy to move wealth to heirs.

Why it matters: When the rate is low, strategies like GRATs and charitable lead trusts are more effective. When it is high, other strategies may work better.

Note: US-specific.

A seller note is a loan from the seller to the buyer for part of the purchase price, repaid with interest over several years. The seller effectively acts as a bank for part of the deal. It is usually subordinate, meaning the buyer's bank gets paid first if things go wrong.

Why it matters: A seller note can close the gap between price and what the buyer can finance, but the seller carries the risk that the business struggles and cannot repay. It is common in management buyouts and sales to family members.

Seller's discretionary earnings is the total financial benefit one full-time owner gets from a small business: profit plus the owner's salary and benefits, plus interest, depreciation and personal or one-time expenses. It is mainly used to value smaller businesses, typically sold through business brokers, where the buyer will also be the operator.

Why it matters: Owners of small companies are often confused when one advisor quotes SDE and another quotes EBITDA, which subtracts a market salary for a manager. The same business will show a higher SDE than EBITDA, and the multiples applied are different.

Senior debt is a loan that gets repaid first if the company runs into trouble, usually secured by the company's assets as collateral. Bank term loans and lines of credit are typically senior debt. Because it is the safest position for a lender, it carries the lowest interest rate.

Why it matters: Senior debt is the cheapest outside money most family businesses can get, but it comes with covenants (financial conditions the company must meet) and often a personal guarantee from the owner.

A shareholder liquidity program is a planned, recurring opportunity for family owners to sell some shares back to the company or to other family members at a set valuation, for example every two or three years. It usually has limits on how much can be sold at once.

Why it matters: Owners who feel trapped tend to push for selling the whole company. A predictable exit path lets unhappy owners leave while the rest of the family keeps the business.

Shareholder oppression is a legal claim a minority owner can bring when controlling owners use their power unfairly, for example by cutting off dividends while paying themselves large salaries or shutting the minority out of information. Courts in many US states can order remedies, including forcing a buyout of the minority's shares.

Why it matters: In closely held family companies, oppression claims are one of the most common forms of family litigation. Transparent reporting and a fair dividend policy are the main defenses.

Note: US-specific; standards and remedies vary significantly by state. Legal review recommended.

A shareholders agreement is a legally binding contract among the owners of a company that sets the rules for owning shares. It usually covers who may own shares, how shares can be sold or transferred, voting on major decisions, how disputes are resolved and what happens when an owner dies, divorces, becomes disabled or leaves the company. It often contains a buy-sell agreement, the section that governs forced or optional sales of shares.

Why it matters: This is the document that actually controls what happens to ownership in a crisis, regardless of what the family intended. Many family companies have outdated agreements, or none, until a death or divorce exposes the gap.

Shirtsleeves to shirtsleeves in three generations is an old proverb describing the pattern of a family's wealth being built by the first generation, maintained by the second and lost by the third. Versions of the saying exist in many languages. Statistics often attached to it are widely repeated but poorly sourced.

Why it matters: The proverb is a warning, not a law: families that invest in governance, education and shared purpose are working to break the pattern. Owners should be careful repeating the survival percentages attached to it without checking the original source.

A shotgun clause lets one owner name a price for the other owner's shares; the other owner must then either sell at that price or buy the first owner's shares at the same price. It is most common between two equal owners.

Why it matters: It breaks deadlocks quickly and pushes the owner naming the price to be fair. It favors the owner with more cash, which can be unfair to a sibling who cannot raise money quickly.

A sibling partnership is the ownership stage where control is shared among brothers and sisters, typically the second generation. Decisions now require agreement among near-equals who grew up as rivals and may have different roles in the business.

Why it matters: The childhood relationships and parents' favoritism of the past carry into business decisions. Siblings who set clear roles, decision rules and exit terms early tend to hold together.

Sibling rivalry is competition and conflict between brothers and sisters, often rooted in childhood and in how parents treated each child. In a family business it can surface as disputes over roles, pay, recognition and succession.

Why it matters: Old rivalries often surface when parents step back and the siblings become business partners. Clear roles, outside facilitation and agreed decision rules help siblings work together.

A single family office serves one family only, with its own staff who work for that family. It gives the family full control and privacy but carries the full cost of salaries, systems and compliance.

Why it matters: The cost of running one is substantial, so it generally makes sense only above a certain level of wealth and complexity. Families that start one too early often spend a high share of returns on overhead.

Socioemotional wealth is a research concept describing the non-financial value a family gets from owning its business, such as control, family identity, reputation, emotional attachment and the ability to pass the business to descendants. Researchers such as Luis Gomez-Mejia have used it to explain why family firms sometimes turn down financially attractive choices.

Why it matters: It explains why families may reject high offers or avoid outside capital. Making those preferences explicit helps a family decide when protecting them is worth the financial cost.

A sponsor is the investment firm that organizes, funds and controls a buyout, usually a private equity firm. The term distinguishes the equity investor leading a deal from the lenders providing debt.

Why it matters: When a lender or advisor refers to "sponsor-backed" deals, it means a company owned by a private equity firm. Lenders offer different terms to sponsor-backed companies than to family-owned ones.

Sponsorship vs ownership describes the difference between a successor who holds a role because a parent is backing them and a successor who truly owns the role, meaning they have real authority, make decisions and are held accountable for results. A sponsored successor has the title but defers to the parent; an owning successor has the decision rights (the written authority to decide) and lives with the consequences. The phrase is used by advisors in different ways, so families should define it for themselves.

Why it matters: Employees quickly see whether the successor or the parent is really in charge, and they follow whoever actually decides. A handoff is not complete until the successor moves from sponsored to owning.

Note: No single standard definition exists in the literature; this entry describes common usage.

A spousal lifetime access trust is an irrevocable trust one spouse creates for the benefit of the other spouse, and often children, using lifetime exemption (the total a person can give tax-free during life and at death combined). The assets leave the couple's taxable estate, but the beneficiary spouse can still receive distributions, giving the couple indirect access.

Why it matters: It lets couples use their exemptions while keeping some access to the money. Divorce or the death of the beneficiary spouse can cut off that access, so the risks need discussion.

Note: US-specific. Legal review recommended.

A step-up in basis is a US tax rule that resets the tax cost, called basis, of most inherited assets to their market value on the date of the owner's death. If the heirs later sell, capital gains tax is due only on growth after the death, so the gain built up during the owner's life is never taxed as income.

Why it matters: It is a major reason some owners hold low-cost assets until death rather than selling or gifting them, because gifts during life keep the original low basis. The trade-off between estate tax savings from gifting and income tax savings from the step-up is central to planning.

Note: US-specific (Internal Revenue Code Section 1014). Generally applies only to assets included in the taxable estate.

Stewardship is the attitude that the current owners hold the business and family wealth in trust for future generations, and their job is to care for it and pass it on in better shape rather than use it up. It contrasts with a view of inheritance as personal spending money.

Why it matters: Families whose members see themselves as stewards tend to reinvest, govern carefully and prepare heirs. Families where heirs see themselves as consumers tend to spend down wealth within a few generations.

Stock appreciation rights pay an employee the increase in the company's share value from the date of the grant to the date the right is used, either in cash or shares. Unlike phantom stock, they usually pay only the growth, not the full value.

Why it matters: They tie a manager's reward to growth that happens on their watch. The plan documents must define how the company will be valued each year.

A stock redemption is when the company itself buys back shares from an owner, using company money. As a buy-sell structure, the company rather than the other owners buys a departing owner's shares, and the remaining owners' percentages go up automatically.

Why it matters: Redemptions are simpler to set up with many owners but can have different tax results from a cross-purchase, and they reduce company cash. Families also use redemptions to let owners who want money sell without bringing in outsiders.

Note: US-specific tax rules can treat some redemptions as dividends; confirm with a tax advisor.

In a stock sale, the buyer purchases the owners' shares and takes over the entire company, including all its assets, contracts and liabilities, known and unknown. Sellers usually prefer it because it is cleaner and often taxed more favorably to them.

Why it matters: Because the buyer inherits every past liability, buyers typically ask for stronger representations, larger escrows or insurance in a stock sale.

A strategic buyer is an operating company, often a competitor, supplier or customer, that buys a business to combine it with its own. Because it can cut duplicate costs or sell more through the combined company, it can often afford to pay more than a financial buyer.

Why it matters: Strategic buyers often pay the highest prices, but they are more likely to merge away the brand, close facilities and cut staff. Families that care about legacy weigh that against price.

A strategic plan is a written document setting out where the company intends to be in three to five years, how it will get there and what money and people that requires. In a family business it should reflect what the owners want, such as growth, income or safety.

Why it matters: Buyers, lenders and successors all ask for it. A founder who keeps the strategy in their head leaves a successor with nothing to inherit but the building.

Subordinated debt is any loan that agrees to be repaid only after senior lenders are paid. Seller notes and mezzanine loans are common examples.

Why it matters: Holders of subordinated debt, including sellers who carried a note, may receive nothing if the company fails. Senior lenders usually require the subordinated lender to sign an agreement limiting its rights.

A success fee is the payment an advisor receives only if a deal closes, usually a percentage of the transaction value. Some fee structures step down in percentage as the price rises, or step up to reward the advisor for exceeding a target price.

Why it matters: The fee structure shapes the advisor's incentives. A fee that rises sharply above a target price encourages pushing for more.

A succession plan is a written plan for who will lead and who will own the business when the current leader steps down, retires, becomes disabled or dies, and how and when that change will happen. A complete plan covers two separate handoffs: leadership (who runs the company) and ownership (who holds the shares). It also sets a timeline and the steps to prepare the successor.

Why it matters: Without a plan, succession is decided by a will, a court or a crisis, and the business often loses customers, key employees and value in the gap. Starting years before the handoff gives time to develop a successor and to use tax planning that takes time to work.

A succession timeline is the written schedule of steps in a leadership and ownership handoff, such as when the successor takes over each department, when titles change, when shares move and when the senior leader steps off the board. Timelines commonly run five to ten years.

Why it matters: A timeline with dates makes the handoff real to employees, customers and the successor. Plans without dates tend to slip indefinitely.

Successor development is the planned process of preparing a future leader through education, outside work experience, rotations through different departments, mentoring and gradually larger responsibilities with real accountability. It is usually written as a multi-year development plan with milestones that are reviewed by someone other than the parent.

Why it matters: A successor who was handed the job without being tested lacks credibility with employees, lenders and customers. Development with honest feedback also tells the family early if the chosen person is not the right fit.

Successor selection criteria are the written qualifications a candidate must meet to become the next leader, such as years of outside experience, education, performance results and support from the board. The criteria are usually agreed by the board or family council before any candidate is named.

Why it matters: Agreeing criteria before names are on the table keeps the choice from becoming a vote on which child the parents love more. It also gives candidates who are not chosen a clear reason.

A supermajority vote is a vote that requires more than a simple majority to pass, such as two thirds or 75 percent of shares or directors. It is usually required for major decisions listed in the shareholders agreement (the contract among owners) or bylaws (the corporation's internal rulebook).

Why it matters: A supermajority threshold protects smaller family branches from being outvoted, but set too high it lets one owner block everything. The threshold should be chosen with the likely future ownership split in mind.

A survival period is the length of time after closing during which the buyer can still make claims against the seller for breaches of representations and warranties (untrue statements of fact the seller made in the sale contract). General representations often survive 12 to 24 months; tax and ownership representations often survive much longer.

Why it matters: Until the survival period ends, part of the sale proceeds is effectively at risk. Shorter periods let the seller move on sooner.

A tag-along right lets a minority owner, meaning one who holds less than half, join a sale when the majority owner sells, on the same price and terms. If the majority owner finds a buyer, the minority owner can insist on selling their shares too.

Why it matters: It protects smaller family owners from being left behind with a new, unknown controlling owner. Investors buying minority stakes nearly always ask for it.

A tax distribution is a payment from a pass-through company (one whose profits are taxed on the owners' personal returns), such as an S corporation or most LLCs, to its owners to cover the personal income tax they owe on the company's profits. It is separate from any dividend or profit distribution.

Why it matters: Without tax distributions, minority owners can owe tax on profits they never received, which creates hardship and resentment. Most operating agreements for family companies should address it.

Note: US-specific.

A teaser is a one or two page anonymous summary of a business for sale, describing the industry, size and highlights without naming the company. It is sent to potential buyers to gauge interest before they sign a confidentiality agreement.

Why it matters: It lets the seller reach many buyers without revealing that the company is for sale. Details that are too specific can identify the company anyway.

Term limits are rules capping how long a person can serve in a role, such as a family council member or director, before they must step down or take a break. Many families pair them with staggered terms so that not everyone leaves at once.

Why it matters: Term limits give more family members a chance to serve and let a family replace an ineffective member without a personal confrontation. Without them, seats become permanent and resentment builds among those left out.

A term loan is borrowed money repaid on a fixed schedule over a set number of years. It is usually used for equipment, real estate, acquisitions or buyouts.

Why it matters: Matching the loan term to how long the asset will produce value keeps payments manageable. Balloon payments at the end of the term need to be planned for years in advance.

Terminal value is the estimated value of a business at the end of a forecast period, representing all cash flows after that point. In a discounted cash flow valuation (one that converts forecast future cash into today's value), it often makes up more than half of the total value.

Why it matters: Because terminal value is so large, small changes to its assumptions swing the valuation. It is the first number to question in any DCF.

The three circle model is a diagram of three overlapping circles, family, ownership and business (management), used to show that each person in a family business can belong to one, two or all three groups. Developed by Renato Tagiuri and John Davis at Harvard Business School in the 1970s and 1980s, it explains why people in different positions see the same decision differently. For example, a family member who owns shares but does not work in the business cares about dividends, while a family employee who owns no shares cares about salary.

Why it matters: Most family business conflicts become easier to understand once each person's position in the circles is mapped. It helps families design policies that are fair to each group rather than assuming everyone wants the same thing.

Trailing twelve months means the most recent 12 consecutive months of financial results, regardless of the calendar or fiscal year. Most sale prices and loan terms are based on TTM EBITDA (cash operating profit).

Why it matters: A seller's timing matters: going to market right after a strong 12-month period produces a better TTM number to price from.

Transfer restrictions are rules in the shareholders agreement or operating agreement limiting who can receive shares, for example only descendants of the founder or trusts for their benefit. Transfers to anyone else, including spouses, are blocked or trigger a buyback.

Why it matters: They are the main legal protection against shares landing with an ex-spouse or creditor. They must match the family's actual definition of who counts as family.

Transferable value is the part of a company's value that will survive the owner's departure, because it depends on systems, contracts, a management team and brand rather than on the owner personally. Advisors often measure it by asking how the business would do if the owner were gone for 90 days.

Why it matters: Buyers pay for transferable value, not for the owner's personal relationships. Raising it is often the single biggest step an owner can take to increase sale price or ease succession.

A transition plan is the detailed operating plan for moving responsibilities from one leader to another, listing which duties, relationships and decisions shift and when. It is the working document that carries out the broader succession plan.

Why it matters: Succession plans often agree who takes over but not how. A transition plan prevents a gap where neither the old nor the new leader is sure who decides.

A transition services agreement is a contract in which the seller agrees to keep providing certain services, such as payroll, IT or shared warehouse space, to the business for a limited time after the sale. It ends once the buyer has set up its own systems, usually within a few months to a year.

Why it matters: It prevents operations from breaking at closing. The seller should define the services, period and fees clearly so the obligations do not drag on.

Triangulation is when two people in conflict pull a third person into the middle instead of dealing with each other directly, such as a child complaining to a parent about a sibling instead of talking to the sibling. The term comes from family systems therapy.

Why it matters: In family businesses, employees and advisors often get pulled into family conflicts this way, which damages trust and slows decisions. Governance that sends issues to the right person or body helps stop it.

A trust protector is a person named in a trust document with specific powers over the trust, such as removing and replacing the trustee, changing where the trust is based or amending terms to respond to tax law changes. The protector does not manage the assets day to day.

Why it matters: Long-lasting trusts need a way to adapt to changes nobody can predict. A protector gives flexibility without handing control to the beneficiaries.

Note: Recognition and duties vary by state.

Trust situs is the state or country whose laws govern a trust and where it is administered. Families often choose a state based on its trust duration rules, state income tax, asset protection and support for directed trusts.

Why it matters: The right situs can let a trust last longer, avoid state income tax and keep family control. It can often be changed later if the trust document allows.

Note: US-specific state law considerations.

A trustee is the person or institution legally responsible for holding and managing a trust's assets and following the trust's rules for the beneficiaries' benefit. Trustees have a fiduciary duty, meaning a legal obligation to act carefully and in the beneficiaries' interest, not their own.

Why it matters: Choosing a family member who runs the business as trustee of a trust holding its shares creates conflicts with beneficiaries who do not. Many families use a professional or corporate trustee, a trust company, or split roles.

Ultra-high-net-worth is an industry label for individuals or families with very large wealth. A commonly used threshold is 30 million US dollars or more in net worth, though firms define it differently.

Why it matters: The label is used by banks and family office providers to decide which services and minimums apply. It is a marketing category, not a legal one.

A unitranche loan combines senior debt (repaid first) and junior debt (repaid after the senior lender) into one loan from one lender, with a single interest rate between the two. It is common in private equity buyouts and is typically provided by private credit funds, meaning nonbank lenders, rather than banks.

Why it matters: It simplifies financing and speeds closing, which helps in competitive deals. The blended rate is higher than a bank loan.

The valuation date is the specific day as of which a business is valued, such as the date of death for estate tax, the date of a gift or the date a buy-sell trigger occurs. Only information known or knowable on that date is supposed to be considered.

Why it matters: The value can change significantly depending on the date chosen, especially near a pending sale. Gifting shares before a sale is agreed can produce very different tax results than gifting after.

A valuation multiple is a number applied to a company's earnings or revenue to estimate its value. For example, a business with 3 million dollars of EBITDA (cash operating profit) valued at a multiple of six would be worth about 18 million dollars. Multiples depend on industry, size, growth, risk and how dependent the business is on its owner.

Why it matters: Small changes in the multiple move the price more than almost anything else. Owners often hear the high multiples paid for public companies and expect the same for a much smaller private business.

Venture capital is investment in young, fast-growing companies, usually startups, in exchange for minority ownership. Venture investors expect most investments to fail and a few to produce very large returns.

Why it matters: Family offices often invest in venture funds or startups directly, and rising-generation members often start businesses funded this way. Its risk profile is very different from an operating family business.

Vesting is the process of earning full ownership of shares, options or other awards over time or after reaching goals. A common schedule gives nothing for the first year and then a portion each year after, so an employee who leaves early forfeits the unvested part.

Why it matters: Vesting keeps key people committed. Families also use vesting-like rules for gifts of shares to young heirs, tied to age or milestones.

A virtual family office is a family office run mostly through outside firms, such as accountants, lawyers, investment advisors and bill-pay services, coordinated by a small core team or a single person, sometimes a family member. There may be no dedicated office space.

Why it matters: It lets a family get organized and coordinated at a fraction of the cost of a full single family office, and it is a common first step. It works only if someone clearly owns the job of coordination.

Voting and nonvoting shares are two classes of stock that share in company profits and value equally but differ in control: only voting shares elect directors and vote on major decisions. Families often give voting shares to those running the business and nonvoting shares to other heirs, or gift nonvoting shares for estate planning.

Why it matters: The structure lets a family treat heirs equally on value while keeping control concentrated. Nonvoting shares are also usually valued lower for gift tax purposes because they carry no control.

Note: For S corporations, differences in voting rights are permitted but other differences between share classes are not; confirm with a tax advisor.

A voting trust is an arrangement where shareholders transfer the voting rights of their shares to a trustee, who votes them as a block, while the shareholders keep the financial benefits such as dividends. A voting agreement achieves a similar result by contract, with owners agreeing in advance how they will vote.

Why it matters: It keeps control unified as shares spread across many family members. It can also frustrate owners who feel they have lost their voice.

Note: State law governs voting trusts; confirm with counsel.

Warrants are rights given to a lender or investor to buy a set number of company shares at a fixed price in the future. They are often attached to mezzanine loans to give the lender a share of the upside.

Why it matters: Warrants dilute family ownership if exercised. Their terms, including how the company will be valued when they are used, deserve careful review.

A wealth transfer conversation is an intentional discussion in which parents explain to their children what they own, how it will be passed down, why they made the choices they did and what they expect. It may happen in stages as children mature.

Why it matters: Heirs who first learn about their inheritance when a will is read often feel blindsided and are more likely to dispute it. Early, honest conversations reduce surprises and conflict.

A will is a legal document stating who receives a person's property at death and naming an executor, the person who carries out those wishes. Property passing under a will usually goes through probate, a court-supervised process.

Why it matters: A will alone often leaves business shares exposed to a public and slow court process. Most business owners use trusts to hold shares so the business keeps running without waiting on a court.

A working capital peg is the amount of working capital (short-term assets like receivables and inventory, minus short-term bills like payables) the buyer expects the business to have at closing. If actual working capital is above the peg, the buyer pays more; if below, the price drops dollar for dollar.

Why it matters: The peg is one of the most negotiated and least understood terms in a sale, and a peg set too high quietly reduces the price. Sellers should model it early, ideally before signing the letter of intent.