Transitions in a family business are difficult. Deciding how and where to grow, changing roles and responsibilities and balancing emotions and egos are all transitions which are amplified in a family business. Research conducted by Roy Williams and Vic Preisser (Preisser, 2003) of 3,500 families of wealth revealed that 60% of family businesses fail to transition from the founding generation to the successor generation due to breakdowns in communication and loss of trust between family members. The transition of distancing family wealth from the family business is no less difficult.

The Challenge

It starts innocently enough. The first bookkeeper in the family business, who is often a family friend, is enlisted to help with some family financial affairs. It may be as simple as pulling together tax return information or as complex as helping the owner apply for a business loan.  This process may continue for many years. Family members become accustomed to it and comfortable with it.

Ten or fifteen years later, when the business is grossing a few hundred million, leadership of the family business financial function has probably transitioned to a financial professional (often a CPA with extensive prior business experience). The financial pro is likely supported by a lean staff that is running at capacity just to service the financial needs of the business. Yet those same staffers, due to tradition, are expected to help family members with their financial needs.  They are often paying bills, or helping with tax returns, bank loans, investment planning, estate and trust planning, educational savings accounts and insurance to name but a few. A large and growing business increasingly requires more and more attention from the financial staff. The finance team is being pulled in two directions. This situation represents yet one more transition in the family business and one fraught with problems.

It’s time to go separate ways

A savvy finance chief like the professional mentioned above will often quietly lobby the family business leader for separation of business finance and family finances. Typically the family leader will resist. The resistance tends to come from several sources. Inertia typically plays a role. Changing existing practices that family members are comfortable with is not easy. There is frequently concern about incurring additional expenses. Others may oppose the change for fear that the service level they receive will suffer. The impasse often lingers until some event forces a decision. The transitional event is often one where the family has a chance to enter another business or some family members don’t want to join the family business but rather want to pursue philanthropic activity. As interests and activities of family members expand beyond just the original family business or branch off into philanthropy the need to separate family finances from business finances becomes clearer and more urgent.

The Family Office emerges

At first the new family financial function or “family office” may consist of little more than one lower level, long term trusted employee being placed in a separate office and tasked with attending to family financial needs. Over time the family office begins to take on a broader role and the skills needed are more extensive requiring more sophisticated skills.

For families with large but not overwhelming financial assets taking their affairs to a firm that offers multi-family office services may prove to be an attractive offering. The original family office employee typically becomes the liaison with the multi-family office team. The service level is fairly high and the cost is not prohibitive.

For families whose wealth reaches the ultra-high net worth level of $500 million or more a stand-alone family office is sometimes justified.

What’s a Family Office to do

The family office can serve as a platform to facilitate family governance and succession planning. Slowly the family office and not the family business becomes the policy platform where decisions about major issues confronting the family are made.

Family Governance

One of the most troublesome aspects of family business and accumulated family wealth is governance. Governance issues tend to receive relatively little attention while the founder is still in charge. If the founder passes suddenly the resulting leadership transition often brings governance to the forefront. If there is no formal succession plan in place at the time of such an event difficulties inevitably arise. Siblings may have conflicting objectives, feelings and aspirations that they express during a transition. Resolving these conflicts successfully is not easy and often takes a lengthy period of time. A successful transition will see the family come together and perhaps even enter into a family constitution that expresses, among other things, shared values, describes how family members may or may not participate in the family business and how wealth will or will not be distributed to those who do not enter the family business.

Succession Planning

If family governance has been addressed succession planning is much easier. Even if there is no clear legal succession plan in place when a founder passes a negotiated agreement on succession can be achieved more easily. In order to resolve conflict among siblings and to formalize the appointment of an heir apparent as leader, a multi-step process is often necessary. A facilitated family meeting led by a team that includes an experienced family business advisor augmented by a professional facilitator and perhaps a neutral advisor from academia is often necessary to establish a “safe environment” conducive to airing family concerns and achieving agreement among remaining family members about how conflicts will be resolved. This allows family members an opportunity to air their grievances. Ultimately, other steps may be necessary such as the addition of independent professionals to a board of directors and/or a board of advisors to assist/advise the new business leader and to empower them is often wise. It is one frequently used to ameliorate concerns of family members as the new leader takes power.  

Taking steps now saves the family business long term

Transitions are never easy, though awareness and planning can help to minimize potential problems. Astute family business leaders will seize upon the wealth separation opportunity to improve family governance and improve the chances for survival of the multi-generational family business. In the process, they confront the inevitable challenges any business faces over time head on.