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Equity refers to ownership or holding stock in the family business. It can also refer to shareholder’s equity which is total assets minus total liabilities – which is the same as net worth or book value. Equity financing refers to selling shares in the business in order to raise capital. Equity financing can take many different forms – with some leading to a sharing of management control. Family businesses may need to deal with key non-family executives wanting equity in the business. In succession planning, potential issues can arise when a child who is not active in the business receives equity in the business.

Advantages and disadvantages of equity financing

A family business can raise capital via debt financing (loans) or equity financing (selling ownership in the business to those who want to invest in the business).

Some advantages of equity financing are:
  • use the money for business purposes without having to pay back the money
  • share the risk of the business
  • gain from the potential experience and expertise of the investors.

Some disadvantages are:
  • investors expect a larger share of profits than those providing a loan since the investors are at higher risk
  • investors, as co-owners, have a right to have their interests taken into account regarding business decisions (Financing a small business -- equity or debt?)


Further reading and external links

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Categories: Financing