| |
The Family Enterprise evolution: addition of the
Family Office to complement the Family Business |
Family offices continued to grow in popularity. Yet the high cost of operating a family office restricted its
availability to the super rich. Today, the average cost of running a family office exceeds $3 million per year.
History of the Family Office
Family Offices began in the late 1800’s, with the appearance of the oil, railroad and steel “barons”. These wealthy
and successful businessmen found it necessary to consult with attorneys, accountants, financial planners, and
insurance agents. However, the responses of their advisors were often in conflict. As a result, the family was left
to sort and analyze each response and make the decision itself, a task most families are unqualified to do.
Frustrated with this process, one family set up a company, independent of its operating business, which employed all
the above professionals to work solely for this family. With this structure in place, the professionals worked together
to meet the goals and objectives of the family.
In the early 1980’s single family offices began to offer their services to other wealthy families. These other
families may not have had the inclination, or perhaps sufficient wealth, to support their own family office. Thus
marked the advent of the multifamily office. The single family office “cost centers” now became profit centers for
the owner families. Moreover, they allowed access to family office type services to a larger group of wealthy families.
Entrepreneur and the Family Office
When forming a new company, an entrepreneur controls all levels of power: ownership, management and finances. As family
and business grow and mature, we see increased demand for participation of other family members. This transition from
autocratic rule to a shared approach to power must occur for the next generation to become the source of trustworthy
and knowledgeable talent. Moreover, deciding the role of an individual family member, whether it is to assume the
executive role, serve in management, join the rank and file or simply hold an ownership interest, warrants thought,
reflection and family dialogue. At this time, the family should start thinking strategically about the future of the
family versus simply the family business.
The intervention of a family office at this juncture, whether single or multifamily can be invaluable. Not only can the
family office identify the goals and values of the family, the family’s internal and external conflicts, and the strengths
and weaknesses of the various family members, it can apply this knowledge to establish a family governance structure
and strategy to manage and preserve the family wealth. By formulating reasonable and responsive solutions to the family’s
business succession, financial and estate planning issues, the family office facilitates the harmonious transition to the
next generation.
Myths
Only families who have sold their businesses need a family office
A family office can be beneficial to many multigenerational companies, especially those in which some members work in
the business and some do not. A family office focuses on implementing an organizational structure that takes into
account the financial and other needs of all family members, those who work in the business and those who do not.
By so doing, conflicts are minimized and family bonds are tightened. Moreover, all members of the family have an
increased understanding of the finances of the operating business as well the family investments outside of the business.
This should bolster the member’s financial and legal savvy, and enhance their purchasing power. Therefore, despite myths
to the contrary, families in which the operating business represents most of their wealth is a prime candidate for family
offices. In fact, given the amount of time, attention, and energy that is necessarily focused on an operating business,
such families may benefit more than their wealthy counterparts from the services of a family office.
Family Offices are solely for managing a family’s wealth
Today family offices may analyze different products for the family, such as insurance, personal lines of credit,
charitable planning, business and family travel and legal services.
Family offices can also harness the family’s purchasing power, enabling it to negotiate better prices and terms for
products and services than individuals could negotiate on their own. The professional staff of some family offices or
their affiliates can even review business plans developed by family members attempting to launch new business ventures.
Another critical role for the family office is sponsoring family educational programs on topics like new developments
in the industry, real estate investments, personal finance, technology or career planning. In addition, the family office
can help connect distant family members and keep them informed about business, family wealth and other issues.
Family offices are only for families who own or have owned a business
Many family office clients never owned their own business but have accumulated significant wealth in other ways.
Examples are executives, land owners, lottery winners and beneficiaries of major law suits. In situations such as these,
the services of a family office can be extremely useful because the families are not accustomed to the sudden wealth and
the issues it can create both within the family as well as outside the family.
Establishing and documenting family values and governance is an important step to the family to its new wealth.
Our wealth is too small; we can’t afford a family office
It may not be the amount of the family’s wealth (above certain minimal limits) but rather the size of the family and how
complicated their issues. The business may start out with the patriarch and matriarch and three children. However, in
20 years it may grow to 25.
When the family grows not all family members will want to be involved in the business. The business may stop growing;
the family office provides an efficient structure to grow the family wealth.
Structuring the Family Office
The family office could start out by simply hiring the founder’s personal assistant to run the family office. It does
not have to be a big expense. At the next level, a family office can include a dedicated staff of professionals – a
lawyer, an accountant, an insurance specialist, an investment advisor – to provide, or perhaps help outsource services.
The last stage could be a full fledged, legal structure, a holding company that owns some shares of the family business
not owned by family members. It also can provide asset management, legal services, trust relationships services and even
a fractional private jet ownership program.
Alternatively, the family office functions can be outsourced to an independent Multifamily Office (MFO). The primary
benefit of an MFO versus a single family office is the reduced overhead expense. Many families with 10 million or more
in net-worth have become clients of MFO’s. By providing services on an outsourced basis through an MFO, it can offer
family member clients the most competitive and advanced financial strategies as well as other services.
Whether the wealth of the family is primarily in the family business or is represented by diverse investment assets,
a family office can serve the family well. By offering the family advanced strategies and financial services, it can
preserve and enhance the wealth of the family while at the same time minimizing conflicts among family members.
Perhaps most important of all, a family office enables the family to apply its wealth in a manner consistent with the
family’s values.
|
Source – «Lexington Family Office Services,
LLC»
|
|
|
|
|
