Navigating shareholder dynamics in a family office environment

By Barbara Young

Family business owners are typically laser-focused on building a successful, competitive, innovative company that will grow and flourish over time. However, an interesting thing can happen as a family business becomes successful. Over time, a family firm can take on a role beyond being an operating company. It can also begin to function as a family office.

This happens almost by default, without anyone taking much notice. Family members begin to access business proceeds for personal uses. The business files tax returns on behalf of family members and manages their investments. Before you know it, you have a full-fledged family office operating within your family business. 

Having a family office embedded within a family business is not inherently a good or bad thing. I’ve seen it work, but there must be very clear parameters for family members as well as employees of the business. Without transparency and alignment as to processes, procedures and expectations, things can go very wrong. Take this example:

I once worked with a very successful family business that had been in operation for multiple generations. It started out simply, like most family businesses, but over time had grown into a highly profitable, diversified business enterprise. Not surprisingly, the operating company eventually took on the role of a family office in many respects. However, the family didn’t come together to define how that family office would function. Instead, the patriarch of the family made decisions unilaterally. He used company funds to buy properties and art without seeking the family’s input. Worse, he refused to let any other family member have a voice in how the business’s profits were invested on behalf of the family, nor did he allow for equitable distributions. In short, there were no communications, no alignment on roles and responsibilities, no buy-in from family members and no exit strategy.

As you might assume, things didn’t end well. Frustrated family members ended up leaving the business and, in turn, the family office. The family’s wealth dissipated, destroying nearly 100 years of sacrifice and hard work in building what was once a thriving, successful family business … and family.

Sadly, this phenomenon — sometimes referred to as going from “shirtsleeves to shirtsleeves in three generations” — is all too common among family businesses. Roy Williams and Vic Preisser wrote in Preparing Heirs; Five Steps to a Successful Transition of Family Wealth and Values that most family wealth is lost because of a breakdown in trust and communications within the family, not because of bad financial decisions.

Below are five recommendations to help ensure a family office that exists within an operating business makes the business — and the family — stronger and more successful.

1. Communicate, communicate, communicate. A family office that operates in an environment of secrecy and on a “need-to-know” basis breeds dysfunction. To avoid that situation, communicate frequently, focusing on respect and transparency. Everyone in the family should have a voice and, importantly, should be listened to. Bring all family members to the table to clearly define the family’s goals and expectations for the family office. Work collaboratively to align on strategy and vision.

Make sure everyone in the family understands the history of the family business as well as its culture and values. Often younger generations who have not worked in the family business may not know the story of how the business was built. Give them that base of understanding, and they will likely be much morevested in and committed to the ongoing success of the business and the family unit behind it. 

Furthermore, discuss the purpose of the wealth the business has created. What are the family’s expectations around how the wealth will be spent? What are the causes or charities the family wants to support? Who decides that? What are the expectations regarding lifestyle spending? Discuss these topics openly and honestly, and document what you’ve agreed upon.

Include children in conversations about the purpose and direction of the family office. They might not be equipped to fully understand investment strategies and philanthropic goals, but they can be introduced to financial literacy concepts at an early age. Help them to understand the value of money and what it can do (for good and bad). You don’t have to talk specific numbers in terms of net worth, but teach them the responsibility that comes with wealth.

2. Define family members’ roles. It’s amazing how few families with family offices embedded within their businesses have discussed who does what. This can breed not only confusion, but also contempt. Family members can come to resent other family members who appear to be “calling all the shots” for the family office. If they feel ignored or devalued, they might be more likely to question decisions made by those in control.

The key is to clearly define each family member’s role and make sure it aligns with their skills and interests. Clarify the different responsibilities of shareholders who are active in the business and those who are not. All shareholders, however, should have visibility into the day-to-day operations and should understand the business’s values, objectives, competition, marketplace and performance.

3. Define compensation. Another sticking point with many families is how, and how much, family members are paid by the business. Are salaries for family members commensurate with the marketplace? Do those running the business receive a larger share of equity?

Many patriarchs/matriarchs believe they have to treat all their heirs equally when it comes to ownership in a family business, as well as distributions. They don’t. Think about it: If you have a child who is a schoolteacher and another who is a successful hedge fund manager, they likely don’t need an equal share of your assets. The key is to openly engage in a conversation with them about who needs (and deserves) what. From my experience, when those conversations happen early on and with extreme transparency, the vast majority of the time the family members involved will support parents’/grandparents’ intentions.

4. Agree on an exit strategy. As much as you might want them all to stay, there will inevitably be certain family members who don’t want to be involved with the family business, and who prefer to manage their personal wealth outside the family office. When that happens, take a breath and remember this: family first.

It’s normal for family members to want control over their assets, some more than others. They should understand that they are free to take their own path with their wealth without risking alienation or ill will from the rest of the family. More often than not, when they have that freedom, they will choose to stay. After all, family dysfunction festers when people feel they can’t make their own decisions.

Sure, make the case for staying with the family office, which can include a greater cumulative impact on philanthropic causes and better economies of scale. However, in the end, make it clear that those who choose to leave are still loved and valued as family members.

Agree upon protocols for family members who want to leave the family office and take their assets to another wealth manager. Also, develop a buy-sell agreement for family shareholders who may choose to exit the business. Document those plans and secure buy-in from the broader family.

5. Develop a shared vision for the future. Nothing can bring a family together like aligning on the long-term impact they want to have. What are the causes the family wants to support? What is the shared vision for making the world a better place? What are the values that allowed the family to have the success it has had? Particularly for younger generations, helping to establish a long-term vision can provide a powerful sense of ownership and purpose going forward.

Where do you start? Begin by gathering the whole family together (virtually if you have to) and develop a family mission statement. Identify family values. From there, establish a strategic plan for both the family business and the family office. That might involve expanding the business, preparing to sell it or transitioning it to the next generation.

Planning for the family office can include diversifying into a real estate holding company, amplifying philanthropic efforts and establishing rising-generation governance committee. The key is to have the vision for the future be a shared vision. That’s what gets family members from every generation excited.

Barbara Young ( is senior managing director and co-head of family office services for Cresset. 

Copyright 2020 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact     


Article categories: 
November/December 2020

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