Not all families with considerable wealth think that a family office makes sense. When there is still an operational business, families often think that dividends and profits from the business are the best way to preserve wealth. That may make sense for some truly entrepreneurial families, but I think there are a number of reasons why a family office might still make sense even for them.
Let’s start with the case for establishing a family office where there is still an operational business. Here is why a family office makes sense in such circumstances, for both the family and the business:
- The family. The best way to secure a family’s wealth across generations is to set up a family office. This takes the risk of the business away from the family, bringing security and diversification. For example, if the business goes through a rough patch or even collapses, the family office can continue to provide wealth to the family. And a family office can continue to provide wealth for future generations, without any recourse to the operational business. So, the family office takes the risk of the business away from the family and secures their financial future. In any case, the family office separates the private from the business wealth and puts a certain desired amount of wealth “across the fence.”
- The business. Often, with family businesses, the chief financial officer (CFO) or chief bookkeeper becomes the first point of contact for managing the private wealth of the family. That responsibility can be on top of their role to manage the finances of the business. This can create a conflict of interest and can be detrimental to the business. It could theoretically lead to questions like: does the CFO or bookkeeper deal with the wealth of the business or the family’s private wealth? If the business is doing exceptionally well, the conflict might be less of a problem. But problems will inevitably arise when things are going less well or if new financing needs to be raised for the business from family or other external resources. A family office can stop such a conflict. This would be better for the family and the CFO. It can also prevent uncoordinated meddling in the affairs of the business by family members. Family members are more likely to stay away from the affairs of the operational business if the family office, rather than the financial department of the family business, handles their financial affairs.
There is also a strong case for an entrepreneur who has recently sold their business to establish a family office. Here’s why:
- Identity. After the business has been sold, a family’s identity can be focused on, or via, the family office. In some ways, it provides a substitute for the business. Indeed, it can actually become the next business of the entrepreneur. A family office can help the entrepreneur to focus on preserving wealth for the family, undertake philanthropic work or start new entrepreneurial projects involving venture capital or business angel activities.
- Discipline. A family office can help to bring discipline to the large amount of liquidity gained from the sale of the business. It can help to focus the family’s attention on the importance of preserving wealth not just for themselves, but for further generations. And it can help the entrepreneur to deal with the challenge of moving from being a business owner to dealing with the management of liquidity on behalf of the wider family.
Whether or not to create a family office is a very personal decision. But a family office has clear benefits. It can provide a way of professionalizing private assets for the benefit of both the family and, where there is still a family business, the business as well.
EY, together with the University of St. Gallen and Credit Suisse, has recently produced a comprehensive guide to setting up a family office. Click here to view the EY Family Office Guide: pathway to successful family and wealth management.
Peter Brock, Executive Director, Family Office Leader Germany, Switzerland, Austria, EY