Today's business-owning families will eventually have to make some difficult decisions related to their business transition and family wealth management. The opportunities and threats have never been greater than they currently are. The decision tree for many of these families offers three options:
⢠Hold on to the company.
⢠Transition the company.
⢠Sell the company.
The biggest pitfalls regarding this decision tree that I have seen families encounter are:
⢠Holding on to the business for too long.
⢠The family's love for the business (considered tantamount to another child in the family) is too strong.
⢠No true planning for any of the options above.
Often, a business-owning family will struggle with the question, “How do we start the decision tree discussion?” This may be followed by statements about the many reasons they cannot move forward, including, “We can't discuss financial matters,” “We're too busy putting out daily fires” and “The timing is not right for us now.”
Getting started is frequently the hardest part of the process. It is helpful for family business owners to remember that even though technical structures, legal advice and good financial planning tools will be useful, the decision-making process is often emotional rather than rational. The most important components of the process are many times indirect and involve the intangible relationships of people, things and events.
A business owner who elects to monetize the family business often comes to the stark realization that once the company has been sold, the infrastructure that previously was available to manage the business assets is now gone. The transition then becomes a question of managing the liquidity from the sale of the business. Many family office structures fulfill that investment management need only.
For family members who elect to hold on to their company, however, a family office can provide an integrated family and business management platform for decision making about the future of the business.
Why family business owners use family offices
Many perceptive family business owners prefer to think in terms of not only “best practices” but also “next practices.” They desire imaginative scenario planning, active debate and suggestions to move their family and their business forward. These families often consider a family office structure for the following reasons:
1. Control and oversight of decision making about family and business matters.
2. Continuity of family unity and sustainability.
3. Access to the expertise of professionals who can offer a variety of options for facing complex challenges.
4. Integration of strategies and actions to maximize family benefits.
5. Services customized to meet the family's particular situation.
6. Confidentiality and privacy.
7. Education of family members and other key shareholders to prepare them to make better life decisions.
Family office structures
Three family office structures are available today.
1. Multi-family office (MFO): A defined number of multigenerational families and their businesses.
2. Single family office (SFO): A single multigenerational family and its businesses.
3. Hybrid family office (HFO): Components of both an MFO and a SFO, including joint ventures.
Each structure offers advantages and disadvantages. Due diligence and analysis are warranted in determining which structure fits your needs, budget and desired level of involvement.
Key questions to consider
Family sustainability and continuity are critical concerns for the family business owner and should be factored into the decision to transition to a family office structure. There are ten essential questions you should ask as you investigate family office services.
1. What is the central reason that we are considering a family office structure?
2. What will be the primary mission of the office?
3. What will be the governance structure? Who will be the decision makers, and how will decisions be made?
4. Which responsibilities will the family or family business staff retain, and which will be delegated?
5. Do family members want to organize and manage the office structure?
6. What is the scope of services that will be provided to family members?
7. What back-office support systems (technology) will be needed?
8. How important will “integrated” business, family investment, tax and estate planning be?
9. How will services be paid for on an ongoing basis?
10. How will the family measure the success of the office or the services received?
How to measure success
The value of the family office services should be assessed in an annual review. Items to consider in your success analysis should include:
⢠Control and reduction of costs and complexity.
⢠The family's purchasing power sustained through multiple generations.
⢠Improved quality and quantity of decisions.
⢠Preparation of future generations for the responsibility of managing wealth for continuity.
While only about 30% of families in business who attempt to transition wealth often succeed, it should be noted that the failure rate generally is not a result of bad legal, estate, tax or investment advice. It is, however, directly correlated to a lack of planning and the inability of family members to either grow or thrive in the family structures set up to assist them. Creating a family office environment that provides family members an opportunity for meaningful, fulfilling involvement may improve your odds for success.
Thomas E. Meilinger is managing director at Vogel Consulting, a multi-family office (tomm@vogelcg.com). More than half of its client base consists of active business owners.