A family business’s “reinvestment rate” — the percentage of all the profits that are reinvested in the legacy business or new ventures, instead of distributed to owners — is the single most important number to look at to determine whether the business is on track to grow. No other number is a better expression of owners’ intent. Reinvestment rate is the answer — explicitly or implicitly — to the question of: How committed are we, as owners, to reinvesting our capital in this business together? When family businesses start focusing on reinvestment rate — rather than on profits or dividends — it focuses them on purpose (“Why do we own these assets together?”) and return on investment (“How could the business use these funds?”), rather than a cash cow for dividends (“What do I get?”). Reinvestment rate can signal whether your family business is on a sustainable path for growth or at risk of bleeding itself dry. How high or low owners set the reinvestment rate is still the best signal of their intentions for the business in the long-term. In this article, the authors discuss how to determine the right reinvestment rate for your family business.
