Too many family business owners think that Capital is only financial. In their excellent book called Complete Family Wealth, Hughes, Massenzio and Whitaker explain the 5 Types of Capital and why they’re fundamental to understand before you exit your business.
The Five Types of Capital
Human Capital: This refers to the members that make up the larger family. Does the larger family promote individual flourishing? Are every family member's basic human needs met? Does each member have the ability to develop their identity separate from the family enterprise? Are we respecting the unique contributions of each member's vocation to a larger society, regardless of its financial reward?
Intellectual Capital: This refers not only to academic education, but to education and knowledge of all types that the larger family accumulates and shares. Does your family promote diverse education, including and beyond academia? Do you have a practice of gathering and sharing this education with other members of the family? Are matters of family business discussed in comprehensible contexts with all those involved? Is the family broadening its intellectual horizons by learning from other cultures and languages?
Social Capital: This refers to a family’s ability to make connections within itself as well as with the larger society, and its ability to welcome new members into the family. This also reflects a family's “ability to make thoughtful shared decisions together.” Are your family conversations or meetings designed in such a way that elicits broad participation? Does your family thoughtfully engage the rising generation in service?
Spiritual Capital: This refers to a family's core purpose that transcends individuals and generations. For those with a particular faith, this focuses based on their faith. This also carries an air of humility: Like social capital, spiritual capital requires that individuals in the family view themselves as part of a larger purpose in life. Do you take time to recount stories from your family’s successes and failures? Do you underline the family’s shared values? Do you practice gratitude as a family? Do you share testimonies of spiritual transformation with other members? Are family gatherings opportunities to nurture faith?
Financial Capital: This is often the most discussed type of capital in the family, and in society at large. But for families that understand its proper position, it serves the other 4 sources of capital. An unhealthy emphasis on financial capital can have several negative effects, including the “black hole” as authors describe on page 40, wherein - whether intended or not - the creator or creators of the bulk of family wealth loom large and dominate focus and decisions. Do family members understand the origin of family wealth? Are you systematically removing the sense of taboo when it comes to discussing financial matters as a family? Are family members being trained, both to steward family wealth as well as to create their own?
Why They Matter in Business Exit Planning
We've seen business owners whose entire identity is wrapped up in their business. When all the signals around them are pointing to the idea that they should exit their business, they go into crisis mode. Either before the sale by getting cold feet or afterwards by being completely lost, business owners who do not understand the other four types of capital are like ships without a sail or rudder.
The flip side is true as well, and it's impressive. We've seen business owners nurture and develop the other four types of capital and use their financial capital to do so. Then when they exit their business, they do even more of what they have already been doing with their personal development, their families, their communities, and their faith. One business owner I know dedicates 2 weeks of every summer to go teach at a summer camp for teens. Ever since selling his business, he's consistently increased the time that he spends teaching young people. And it's hard to imagine a better teacher that they could ask for.
So, we encourage you, as outlined in Complete Family Wealth, to get to know and develop all types of capital, not merely financial. And remember to keep financial capital in its proper perspective, serving the other four types of capital.
Any opinions are those of Timothy Weddle and not necessarily those of Raymond James. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation.
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