Family Offices: When, Why and How
Gallo, Miguel Ángel; Gómez, Gonzalo
Publisher: EUNSA. Ediciones Universidad de Navarra
Original document: Evolución y desarrollo de la empresa y de la familia
Professionalism, trust and order are three pillars that sustain a family-owned firm's unity, which is its essential strength. But keeping those pillars stable and strong as the company grows and the family expands may be the greatest challenge faced by a multi-generational family-run business.
Miguel Ángel Gallo, professor emeritus of IESE, and co-author Gonzalo Gómez analyze how to foster unity in a family business and when it may be a good idea to set up a family office. Their book on the subject was published in Spanish by the Chair of Family-Owned Business at IESE.
Smoothing the Rough Edges
The family-office structure, which in and of itself does not guarantee anything, opens up a forum for discussing two issues that tend to be touchy or downright taboo: the family's patrimony and personal relationships.
If the goals are well-defined and the legal structure is adequate, a family office can help simplify business development -- growth, diversification, professionalization and more. It can also help smooth out wrinkles that gather over time by aiding with succession issues and incorporating new ideas as well as new members of the extended family.
The family office should address issues related to the family and its property, including who owns what share of the company. But it should not take over the governance and management of day-to-day operations, the role of senior executives or the board of directors. Nor should the family office be dedicated to calling meetings to placate certain members of the family, especially those not directly involved in management who might complain about their voices being heard.
Kinds of Family Offices
The family office may be defined as "the family's governing body," a "structure to foster family unity," a group of professionals dedicated to "conserving the economic wealth of the family," "improving its tax status" and/or "helping with the training of the next generation and the process of succession."
In other words, there is no simple, commonly accepted definition of a family office. Indeed, each family ends up organizing its own structure keeping in mind three main variables:
1. Who is served. The range of client options is very broad. Services may be offered exclusively to the business owners or they may be open to all members of the family. In practice, there are many kinds of business ownerships (including future owners, indirect owners, those who have usufruct, etc.) and different types of family members (direct and indirect descendants, the extended family, etc.). As such, it is usually best to limit the scope of family-office services to those who observe the family protocol.
2. What services are provided. Of course, this will depend on the particular needs of each family and the resources it can or wishes to earmark for these services. The most common offerings are:
3. Who develops and offers the services and how. Again, there is no commonly established formula. Rather, there can be three different kinds of situations, often existing simultaneously:
- Services to protect and increase the family's wealth via economic, tax-related and legal initiatives.
- Services to help train family members to be competent managers and/or responsible shareholders.
- Services to enhance the scope of the legal and economic framework of the family business.
- Services to realize the company's corporate social responsibility (CSR) initiatives and the charitable giving of family members.
- Services to promote family cohesion and in order to improve relationships among its members, through meetings, group trips and/or family gatherings.
- The family-run business, either directly or through a subsidiary or sister company, takes charge of defining and offering these services.
- An outside organization is hired specifically to provide such services.
- Several specialized, outside organizations are selected to offer the various services.
There can be almost as many kinds of family offices as there are companies and families. The options for combinations are many and varied. And the results can be, too. For this reason, the authors dedicate the second half of the book to analyzing five real-life cases.
The situations in each of the five cases cover a lot of terrain, as the families selected are in varying stages of the succession process and with varying levels of complexity in their business assets and legal-corporate structures. Because of this, it is more likely readers will identify with one or more examples and take home some practical advice.