Five Common Triggers that Prompt Business-Owning Families to Establish a Family Office

Date: May 02 2014

Family Office Exchange

As the family grows, both in number and wealth, it is critical to address the management of the family’s personal financial future with the same diligence that goes into managing the future of the business. So when should you separate and move your financial affairs away from the family business?
In our research of business-owning families, we’ve found that there generally is a catalyst for change that prompts business owners to separate the family office from the family business.
  1. Liquidity Event – A sudden inflow of liquid wealth – from a partial or complete sale of the business – helps owners realize that they need an entity that can strategically deploy their family capital and provide a consolidated picture of their personal wealth, as opposed to getting bits and pieces from employees in the business, bankers, accountants, and other advisors.
  2. Complexity of Wealth – When businesses are successful, the family wealth typically reaches a complexity level where there is a driving need for centralized information, professional advice, and tax-efficient structures
  3. Demographic Trends – Retiring baby boomers can no longer use their operating company resources to manage their personal finances if they are not working in the business. This act of stepping down from the business compels them to separate personal affairs from business operations. In addition, financial needs in retirement change, and the owner begins thinking about needs of future generations. The focus of the business founder shifts from wealth creation to wealth transfer and wealth preservation.
  4. Global Economic Crisis – Families are more educated than ever about conflicts of interest and understand the need for an independent advisor to help them diversify their personal assets. The loss of liquidity during the 2008-2009 crisis taught many wealth owners valuable lessons about income diversification and risk management.
  5. Non-Investment Risks – By continuing to manage family wealth inside the company, both the family and the business are vulnerable to a high degree of personal, privacy and even legal risks. Some of these risks include using employees who don’t have the right technical knowledge, disruption to business operations, violation of the personal privacy of family members, and use of company resources for personal gain. Perhaps even more important, lack of equality among benefits provided to shareholders and family members can result in intra-family disputes and jeopardize the long-term, multi-generational continuity of the family.
When owners face these catalysts and the risks outweigh the convenience of the current situation, they generally are compelled to establish an independent family office. While many business owners resist a complete separation because they want the ability to share company resources and minimize costs, there are many incremental steps families can take to move toward separation.

This blog post is excerpted from the new FOX white paper, Managing Family Capital Generated by the Family Business, which looks at the advantages of separating a family's wealth management from their operating business.