How to find and prepare the right successor in the next generation for your Family Business

How do you find and prepare the right successor in the next generation for your Family Business? You choose a successor leader of the family who has earned the trust and respect of the other family members.

Why do Family Businesses fail from one generation to the next?

At my first family office meeting with the P. Family, I asked them what they thought were the main reasons for a business family to fail from one generation to the next? I explained that the two most common reasons are: lack of communication and unprepared heirs.

Lack of Communication

Mrs. P. and the adult children agreed that better communication was a top family priority. Mr. P., a renowned speaker and writer, was taken aback by this revelation, and was determined to address it. I then recommended that the family have a weekly meeting on Zoom from wherever they were located at the agreed-upon time of Wednesday’s at 12:00 noon. The weekly agenda would have two topics: the family and the business.

The next day Mrs. P. wrote to me with many thanks for creating a framework for the family to have better communication.

Sometimes the simplest suggestion can resonate and have the most lasting impact.

Unprepared Successor and Heirs

At the second meeting of the P. Family, we considered the issue of how to prepare the successor and the heirs. For a family to preserve its wealth it must, like any business enterprise, create wealth, particularly in the form of the family’s human and intellectual capital, while exercising excellence in its stewardship of the financial capital.

We discussed how human capital can be enhanced through the following practices:

Dignity of Meaningful Work: this is important for an individual’s sense of self-worth; and the family can assist each family member in finding the work that most enhances that person’s pursuit of happiness. All such work is of equal value to the family and to the growth or the family’s human capital, regardless of its financial reward.
Highest Educational Standard: such a goal ensures that every family member understands, at the highest educational standard possible for that individual, the workings of the family governance system and his/her role in it.
Without intellectual capital and with all the money in the world, undereducated family members will not make enough good decisions over a long period of time to outnumber their bad decisions. There is a need to provide a forum and support for educating family members in their own personal development, but also to be responsible owners of family assets and possibly the family enterprise. Intellectual skills are necessary, such as how to read a balance sheet, understand key elements of the legal structure and relevant agreements governing the family assets and family enterprise, how to be an effective board member, and how to ask the right questions of executives running the enterprise.

What makes a succesfull business family?

We also discussed the characteristics of successful business families:

Meaningful connection to each other;
Meaningful connection to the business;
Functioning governance structure;
Trusted and respected family leader; and
Appropriate engagement with family, shareholders and business.

As the meetings with the P. Family continued, it became clear that Mr. P. was handing over more and more responsibility to his daughter, M., to run the family business, as his health was deteriorating. Unfortunately, this was a case of a father’s unconditional love blinding him to his daughter’s lack of education, inadequate preparation and incompetence. As M. took over more of the business, she terminated the senior advisors that Mr. P. had hired in favour of her own peers, whom she could control.

In her pursuit of the wrong God in furtherance of ambition, without the counterbalance of prioritizing the management of threats and the protection of assets, M. put the family’s business and legacy at risk.

Eventually, the family business failed.

Fortunately, Mr. P. had set aside surplus investments which now provided the family with the wherewithal to persevere without the family business.

Lessons to take away:

sometimes the simplest solution, such as a weekly family Zoom meeting, can resonate and have lasting impact;
choose a successor leader of the family who has earned the trust and respect of the other family members; and
a critical issue for families to consider is the extent to which members of the younger generation are meant to be owners of assets or custodians/stewards of assets for future generations. In the P. Family, M. styled herself the owner and not the custodian/steward, which proved to be the undoing of the family business.

As a tax lawyer at Gardiner Roberts LLP and a partner in the complementary family office of Omega WealthGuard Inc., I have helped successful families remove obstacles to preserving wealth and harmony. I work with the family to identify how to leave a legacy and preserve values for succeeding generations. With my background in law, I start with asset protection, tax and estate planning. However, over the years these services have expanded to include leadership development, strategic planning, organizational development, effective decision making, governance structures, family dynamics, business savvy, experiential education, coaching and so on.

Gardiner Roberts LLP & Omega WealthGuard Family Office
+1-416 6251 832
https://www.omegawealthguard.com
[email protected]

Lorne Saltman

Gardiner Roberts

grllp.com

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Introduction to Basic Family Charters

Introduction to basic Family Charters

There are some frequent questions that are raised by researchers when looking into a specific matter. Some of them seem to have obvious answers when, more frequently than not, this is not the case.

What is a Family?

A Family is a group of individuals having in common a blood bond, or a kin relationship, derived from marriage or adoption. All civilizations across the globe have allocated a special place to family clusters or units. However, and for a number of reasons, not the least being the rather permissive mode of living in the West, children, after having attained the maturity age, leave their parental home and become, in a certain way, and to a certain extent, independent.

They participate in family gatherings every now and then, celebrate religious and other holidays together, just about what, and in some cases the bare minimum, that is required to keep their relationship with their parents and siblings.

Exceptions may be found in business dynasties, but the reason is mainly attributable to the need to preserve family wealth, by promoting closeness among its members, more than to the sense belonging to the Family per se. However, the meaning of a Family, in the Middle East for instance, has an extra moral dimension.

The larger a Family is, the strongest it is believed to be. This strength is consolidated by the fact that the children of the Family do not normally leave their parental home other than when they get wed; and once they do that, they keep returning home and inter-acting with the Family members on a very regular basis.

A Family is thus a social unit, consisting of parents and the children they raise. This is an obvious definition. However, in the business world we have seen extended families comprising of not only blood members. While in-laws admitted in the Family are not typically considered as Family members in the strict sense of the word, we have come across families where sons and daughters-in-law, or daughters and sons-in-law, have either been involved in the Family business or been given the opportunity of benefitting from such business, to an extent that justifies making them part of the business Family. Some other Families have expressly excluded non-blood Family members from the Family business and affairs.

What is a Family Charter?

Most Family businesses are governed by unwritten understandings, rules or tacit agreements governing their day-to-day running, their targets for the future, and how they anticipate the next generations will become involved. However, just like any unwritten arrangements, these are likely to generate disputes and conflicts over ambiguous and unclear matters.

A Family Charter is a written statement of intent, or arrangement entered into by the Family members in relation, most of the time, to a Family business, other assets or Family matters in general. A Family Charter is also defined as the Family’s constitution, or protocol, handling the ownership, operation and disposal of the Family business and other assets. It is also a statement of agreed values, aims and relationships regarding the assets commonly owned by the Family members.

Who needs a Family Charter?

Families with no substantial wealth, let alone unwealthy families, do not really need to go through any lengthy procedures to ensure that the value of the assets they leave behind is preserved, protected and maximized as the years go by. However, the patriarchs of wealthy and high net worth Families do have a legitimate concern regarding the future of their business which they will have spent decades building, not only for them but also for their descendants.

Family Charters are mostly needed in families who have a substantial operating business. Not only members of the Family, who are directly involved in a Family business, need a Family Charter, but also, and maybe more importantly, those who are not involved. The latters feel more comfortable knowing that the Family wealth is being managed, with transparency, under proper governance and according to solid structures and principles.

Is the Family Charter Enforceable?

A Family Charter is unlikely to be a legally binding document. You may view it as more of a mission statement for a Family, or for a Family business with which Family Charters are frequently associated. It may include, in addition to more easily assessable tangible provisions, a statement of values and ethical guidelines that are insufficiently precise to be enforced or, if violated, are not subject to any accountability. Having said that, and although a Family Charter is not, on the face of it, a perfectly legally binding document, it contains several provisions which reflect the consensus view of the Family stakeholders on specific matters. It should be viewed and assessed in the context of the overall framework of governance for the business, supporting the business plan drawn-up for the Family.
One way to ensure the enforceability of a Family Charter, and to convert what are moral obligations into legal duties, is to make the Charter as close as possible to a binding contract. If every Family member contributes to the Family Charter by attending the meetings held to discuss it, voicing their ideas and concerns, negotiating with other Family members, and agreeing with them on its terms. If all such members sign off on it, the Family Charter becomes a contract, and will thus be enforceable as such. If rallying all Family members around a legally binding Charter is impossible, for whatever reason, then the most important provisions of the Charter may be embodied in one or more separate deeds, to be signed by all or some of the Family members. The notarization, or other types of authentication of the signatures, reinforces the enforceability of such deeds. Needless to add that only those of the Family members who will have signed the deed shall be bound by it. https://www.linkedin.com/in/saba-zreik-13122a18/?originalSubdomain=lb

Saba Zreik

Manal Consultancy

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The History of the Family Office

It is often assumed that the acclaimed American family, the Rockefellers, pioneered the family office in the late 19th century. However, history suggests otherwise. While today’s family offices are a modern phenomenon, they have always existed in various shapes and forms since ancient times.

The discussion around family offices has intensified over the last decade as an increasing number of affluent families take a structured approach to their wealth management. Yet, we are not likely to ever find a uniform definition that encompasses everyone’s notions of what these offices should do or entail. To gain a better understanding of the variety of services that exist and are likely to emerge in the coming years, we must first examine the earliest manifestations of family offices.

The Family Office in History

In the distant past, wealth and possession were almost always connected to rulers and the ruling class because they were the only ones with the power and means to amass vast wealth. But what is often forgotten is that their fortunes needed the kind of management and stewardship that we can see today.

A good example of this is Emperor August Caesar, who ruled the Roman Empire from 27 BC-14 AD. Considered to be one of the wealthiest people that ever lived, he ruled an empire that generated approximately 25% of the global GDP. A great portion of the empire’s assets was directly owned by Caesar or by members of his inner circle, including Marcus Licinius Crassus, one of Rome’s leading politicians at that time.

But Caesar is just one of a long list of extremely wealthy rulers that include Emperor Shenzong (1048-1085) of China’s Song Dynasty, Alan Rufus (1040-1093) the first Lord of Richmond, Mansa Musa (1280-1337) the king of Timbuktu who became unbelievably rich from the gold production in Mali, and Akbar I (1542-1605) the greatest emperor of India’s Mughal dynasty.

Though these figures hail from different times and lands, they are united by one common trait – they shared their wealth with a trusted inner circle comprised of high-ranking officials and local representatives, who took on roles that are reminiscent of family office staff members today. This inner circle managed his estate, industries and businesses within his jurisdiction, the military, as well as the ruler’s lifestyle through a well-organised group of appointees.

Due to their position of power, most of these close confidants were also able to amass great wealth for themselves, and they in turn employed a number of people to care for their family and possessions. The head of such a team was often referred to as a ‘majordomo’, the highest (major) person of a household (domūs) staff.

In modern terms, these arrangements could be referred to as ‘embedded single-family offices’, in which family business staff members also help to manage the private wealth of the family. While these set-up’s are clearly not exactly comparable to today’s modern single-family office, the structures and motives are not dissimilar. The differences chiefly exist in what made people wealthy and the strategic allocation of their assets.

The Turn of the 19th Century

American industrialist, philanthropist, and private entrepreneur, John D. Rockefeller Sr., is often referred to as a crucial figure in the history of family offices. As co-founder of the Standard Oil Company, he controlled approximately 80% to 90% of the worldwide oil industry by the end of the 19^th century. His fortune stood at $1.4 billion at his death in 1937, accounting for more than 1.5% of the US economy. Equivalent to approximately $255 billion today, Rockefeller’s wealth is considered to be one of the greatest in history.

In 1882, Rockefeller established an office of professionals to organize his complex business operations and manage his family’s growing investment needs. This office would manage his wealth as an investment portfolio instead of singular business entities, and his assets were consolidated under the Standard Oil Trust. This institutionalised set-up is generally considered to be the first modern single-family office, although at the time it was never referred to as a ‘family office’.

Generational planning formed an essential part of Rockefeller’s wealth management, as did his enormous engagement in philanthropic causes. Most of the family assets were over time organised under trusts, of which the majority still exists today.

Although other well-known names in U.S. history soon followed his example, it was only in the late 20^th century that single-family offices grew in number and multi-family offices began taking shape. It was also around this time that the institutionalised single-family office concept crossed the Atlantic and appeared in Western Europe. Today, the spread of family offices have reached developing markets throughout Asia, Russia, and the Middle East.

The Problem with a Uniform Definition of the Family Office

As the interest in both single- and multi-family offices increases, the importance of understanding what they are and what added-value they bring are naturally on the rise. Surprisingly, a great number of affluent families and financial services providers alike struggle to define what a family office is and what type of services it offers. The global financial services industry has also yet to provide a uniform and comprehensive designation.

There are basic definitions of the family office that are commonly used but oversimplify the complex reality of the industry, such as:

A structure that manages the investments of an affluent family.
An entity that supports affluent families with everything.

In reality, family offices and the families they serve are much more multifaceted and diverse in their typology. There are also considerable differences between single- and multi-family offices, which further complicate the possibility of one overarching definition.

What is a Single-Family Office?

Single-family office activities are, in most cases, much broader or considerably different from the two basic definitions mentioned above. They generally develop over time in response to the unique and particular needs of the founding family. Their support can stretch far beyond just managing the investments of the family, but, due to the costs involved, there are almost no single-family offices that support their founding family with all their needs. Quite a number of family offices support the family only with their non-financial needs, such as tax and legal services, philanthropy or lifestyle management.

Interestingly, single-family offices often do not carry the title of ‘family office’ and it is not uncommon that a family does not realise that the services they have lined-up fall under the umbrella of family office services. This includes business-owning families that require one or more members of their corporate staff to support them with a wide range of personal matters. Such an ‘embedded single-family office’, without a dedicated structure, one nowadays especially finds in emerging markets.

It is just as difficult to assess the total number of single-family offices as it is to define what they are. Most global statistics do not account for embedded single-family offices nor do they count single-family offices that operate without an investment license, resulting in wildly different estimates that range from the thousands to over ten thousand.

With so many interpretations and types in existence, the only inclusive definition of a single-family office is the following:

A single-family office is a privately controlled (group of) staff employed within or outside a dedicated structure that supports an affluent family with the organisation, management, and maintenance of all or parts of their assets, needs, and wishes.

What is a Multi-Family Office?

A strong multi-family office trend exists today, with new providers opening up almost weekly around the globe. One would think that the services offered by a multi-family office would be similar to those provided by a single-family office, with the exception being that the same services are offered to a number of families as opposed to one. However, the more important difference is that multi-family offices are almost always commercially operated companies that aim to generate profit for themselves in addition to the families they work with.

Today most jurisdictions neither protect nor regulate the use of the title ‘family office’. Any company can call itself a multi-family office and offer multi-family office services without having any specific qualification or experience. In most cases, services offered by multi-family offices are strongly tied to the backgrounds and expertise of the founding partners. A former tax lawyer setting up a multi-family office will most likely focus on structuring assets, while a multi-family office established by former bankers will probably provide investment services. And although these two are drastically different, both can call themselves a multi-family office.

Taking these variations into consideration, we can propose the following definition of the multi-family office:

A multi-family office is a privately controlled and commercially operated organisation that employs staff to support a number of affluent families with the organisation, management, and maintenance of parts of their assets, needs, and wishes.

The Future

Now that we have a better understanding of how family offices are classified, what developments in this industry can we expect in the coming years? All wealth reports predict that global wealth and the number of Ultra High Net Worth individuals will increase considerably in the coming decade. Single- and multi-family offices will continue to grow in number, not only because there will be more affluent families, but because families now want to exert more control over their wealth. Succession and next generation planning will also become important topics of discussion, especially in emerging markets, meaning that also those families will begin to look for a holistic approach to wealth management.

Although many service providers might start calling themselves private investment offices or family business advisories, they will ultimately be offering the typical family office services outlined above. As a result of the growing popularity of the concept, a number of jurisdictions will begin to introduce regulations. Those will probably only be covering financial consulting and trust services.

Just like the family-owned business that they serve, family offices are unique organisations that are distinct from one another. At the same time, they all aim to deliver similar types of services to the same type of clientele. They may develop over time and maybe even adopt different names, but they are and will continue to support affluent families with managing and maintaining their wealth for future generations. https://www.linkedin.com/in/jan-van-bueren-0a522111

These archived articles are written by authors no longer participating in the Family matters on line project. These articles may still be relevant however. If you want more information please do not hesitate to contact us and we will try to put you into contact with the original author or another expert in family matters.

Family governance: charities, philanthropy, education and family offices

Family Governance is how families make decisions together. If they create a good system, i.e. one that includes transparency, accountability and participation—they should be able to avoid the family fights that often occur in inheritance-related disputes. The process the family follows in creating a good governance system is easy to understand but requires the commitment of all family members. By simply going through a good process to create documents like a Family Constitution or a Family Mission, the family is at the same time practicing good governance in a “hands-on” practical manner. This article includes “how to” create a good family governance system.

Why do wealthy families have such public fights about inheritance issues? How can they avoid them? How can creating a good family governance system help?

Charities, philanthropy, education, family offices and good Family Governance

Family Charities and Philanthropy. Many families are involved in charities that are important to the family. Sometimes these are areas of concern that pull the family together; sometimes these are actual operating family charities. These can also be included in a Family Constitution. Some examples include:
- Agreeing on annual grants from the family charity to direct needs
- Creating and supporting an orphanage, a business school, a mosque, etc.
- Working through “RFP”s (request for proposals) to ask direct charities what they would do if they received a grant of a specific amount.
- Creating a “younger generation” group that would be authorized to agree on and distribute a certain amount each year.
- Include an investment committee that would provide oversight to ensure that the investment funds being held for charity would include restrictions on the permitted investments that would be aligned with the family’s values.
Family Education Oversight. In looking ahead to the future many families decide that the quality of education of all of the young family members will be a critical factor in the long-term success of the family. Those families have included in the Family Constitution an obligation to oversee the education of all family members. Some create specific education modules that are designed to make the younger family members future owners with a strong knowledge base in the areas of concern to the family (this could be only investment skills or could include an understanding of the family business.)
Creation and Operation of one or more Offshore Trusts. Many families decide that they want to separate out some “safety” amount of the family wealth to set aside for any unforeseen needs of the family. A trust is often the ideal arrangement to use, and to diversify any economic or political risks, these trusts are usually set up in an off-shore jurisdiction. The terms of the trust can usually be written to cover any of the specific needs the family wants to provide for. For example, many families are concerned about potential uninsured catastrophic health care costs. Sometimes the trust is to be available for starting a business or buying a home.
Creation of a Private Trust Company. Whenever a family has a substantial number of trusts the issue of selecting the right trustee (or trustees) is often difficult. Several states in the United States have passed very friendly laws for families to create their own trust companies. Those trust companies can then serve as trustee of the family trusts (and the family owns the trust company.) In some cases the family trust company will partner with a large institution to provide the back office administrative and regulatory services. Several off-shore jurisdictions also have laws that welcome private trust companies.
Establishing and Operating a Private Family Office. When a family decides it has needs that justify hiring dedicated staff employees to serve those needs, it often decides to create its own “family office.” The provisions about the family office would be very much tailored to the needs of the individual family. They might include:
- Individual budget reviews
- Payment of all bills
- Hiring and supervising household staff
- Maintaining additional homes, yachts, aircraft, etc.
- Curating any special collections
- Obtaining appropriate risk coverage
- Putting in place emergency provisions (including kidnap protocols)
- Coordinating trusts and wills
- Overseeing the operation of any family charities
- Ensuring that appropriate tax planning is always in place
- Overseeing the investment of liquid portfolios (in some cases this is the only function of the family office, in which case they are more accurately referred to as private investment firms.)
Family Venture Funds Most families received the family wealth historically from an entrepreneurial business venture. With a concerned eye on the negative “shirtsleeves to shirtsleeves in three generations” proverb, many families are working proactively to instill and encourage that original entrepreneurial spirit. One way to do that is to create a Family Venture Fund, which might include the following:
- A fund from the family wealth is set aside to be used for new entrepreneurial projects.
- A family member would present a proposal, with a complete business plan, to the committee in charge of approving proposals.
- The approval committee could include a non-family member with experience in the particular field involved in a proposal.
- The committee could require a pay-back schedule.
- The funding could be as an ownership investment, a loan, or a gift.
- If it is funded as an ownership interest, the family will have one more common asset to tie them together.
- On-going monitoring is usually included (part of “accountability”).
Annual Family Gatherings. Finally, for the family to stay strong and connected to each other, they need to be with each other. Most families who work on family governance include a provision for annual gatherings. The annual gatherings can include:
- Celebrations of family milestones (anniversaries, graduations, public recognition, etc.)
- Fun team-building activities (river rafting, mountain climbing, camping, group cooking, fishing, etc.)
- Educational programs, about the family business or investment topics or professional skills building
- Reports on the operation of the family business, family investments and any family charities.
- Family stories and family history presentations
- Creation of a family history book
- Talent shows by family members

How can family a succeed?

• By creating a tailored family governance system.
• Family governance can take many forms—go ahead and be creative.
• The key is to include and respect all family members in creating a system for family decisions.
• With “transparency”, “accountability” and “participation” a family’s governance system should result in multi-generational success and continuation. (end of 4th article?) https://www.brhauser.com/