As family businesses grow and branches of the family tree spread, an increasing number of family members may have an ownership stake in the enterprise. In most cases the business has become a highly profitable and professionally run organization. Family owners may find themselves in need of services to help manage accumulated wealth, plan philanthropic giving, coordinate family meeting activities, or arrange other financial and personal services. Family offices, which are a professionally managed financial organization formed by a single or multiple families, can be used to manage and support many of these needs.

Here are three key takeaways from the Family Business 360 podcast episode “Family Offices: An Introduction and Leading Practices,” featuring Carol Wachter and Eric Johnson of Deloitte Tax LLP, and Larry Donckers of Progeny 3, Inc. You can also listen to the complete podcast episode online.

When should a family business think about starting a family office?

In general, there a couple of times when it makes good sense to consider a family office. The first is when the family has a liquidity event, such as a sale of a portion of their assets, and they find themselves with cash they would like to invest or use to provide services to family members. The second is when the functions of a family office are already being performed within the operating company and the family wants to structure those functions more formally as a separate entity.

There isn’t a set list of requirements to meet before a family considers establishing a family office but it’s important to look at value of assets, complexity of family structure, and how much control the family wants over family office operations.

Typical family office structures

Family offices can be highly customized for the needs of each family, therefore family offices are defined less by the functions they serve and more by the overall operating structure. Single Family Offices (SFOs) are separate operating entities that are professionally managed to serve a single extended family. SFOs usually require the largest investment of time and resources to establish but provide the family with the greatest level of control over services and function.

Multi-Family Offices (MFOs) can function similarly to SFOs, except they serve the needs of several unrelated families. Joining an MFO usually requires less of investment of time and resources than a traditional SFO, but the family may not have as much control over how the office is run.

Virtual Family Offices (VFOs)  typically occur when a family’s outside advisors work together to perform the functions of a traditional family office, but is not a separate operating entity.

Family offices can deliver a variety of benefits

Family offices can serve a variety of direct and indirect benefits to family businesses. First, they provide a higher level of control over assets and investments, and offer an opportunity to bring services offered by outside providers under the family’s control. Family offices can help a family set up a more formal governance structure and engage family members that don’t work directly for the family’s operating businesses. The family legacy can benefit by a more structured approach to family philanthropy and education.

From a financial standpoint, the family may save by not paying outside firms for services that the family office can take over. Pooling resources may allow a family to make investments that would normally be impossible if each family member were limited to their own individual assets.

Listen to the complete episode on the Family Business 360 podcast for more comments and insights on family offices.

Visit our website for a listing of upcoming Family Business 360 breakfast events.

Thank you to Carol Wachter and Eric Johnson of Deloitte Tax LLP, and Larry Donckers of Progeny 3 Inc. for appearing on the podcast.

 

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