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When family office meets family business: Best practices and top trends

January 4, 2024 Article 8 min read
Brian Carter Mike King Wealth Management
Operating an embedded family office within an operating business presents unique challenges — as well as opportunities. To run a well-functioning family office and maximize efficiencies while also operating a successful family business, consider these best practices and emerging trends.
Two business professionals discussing family offices.Many successful family-owned businesses also manage embedded family offices within their existing operations. But in time, families grow. Earlier generations transition out of the business. Wealth outside the business expands, and assets diversify. The needs of both the business and the family shift. Operating an embedded family office presents unique challenges — as well as opportunities, including the opportunity to formalize and maintain a distinct family office that serves the needs of the family at large while still operating a successful business.

Operating an embedded family office presents unique challenges — as well as opportunities.

If you aim to run a best-in-class, well-functioning family office and maximize efficiencies while also operating a family-owned business, consider these best practices and related emerging trends.

1. Family office structure: Develop a comprehensive governance model with defined roles and responsibilities

An effective governance model is the cornerstone of a successful family office operating within a business. Your family office structure should include a family office mission, advisory boards, and documented processes for decision-making, sharing information, and seeking input through regular family meetings and family education sessions.

Within your family office structure, it’s crucial to establish clear roles and responsibilities for each family member and staff member involved. Clarity helps avoid conflicts, reduces confusion, and streamlines decision-making. Family members, as owners or stakeholders in the business, need to understand their roles in governance and management. Likewise, professionals hired to run or who carry out functions for the family office also should have clearly delineated areas of expertise and responsibility.

Success of a family office within a business depends heavily on the competence, capabilities, and professionalism of the individuals managing it. Given common resource constraints and gaps in expertise, families can opt to outsource many functions, including wealth management and investment advisory, financial planning, and philanthropic planning. Outside experts can provide guidance and help the family office make sound financial decisions aligned with the family’s objectives and the family office mission. Outside experts also can provide services or perform functions that are often left unattended when the family office is run from within an operating business.

Success of a family office within a business depends heavily on the competence, capabilities, and professionalism of the individuals managing it.

A governance framework with clearly defined roles and responsibilities, the right expertise, and a high degree of professionalism enables family members to participate in the business while advancing the family office mission.

2. Develop a comprehensive family office wealth management and financial strategy, and separate personal and business finances

To maximize the benefits of a family office operating within a business, it’s essential to establish a long-term family office wealth management and financial strategy that aligns with the family’s goals. Your financial strategy should encompass investment planning, risk management, tax optimization, and estate planning. Professionals serving the family office should work closely with family members to develop and implement the strategy effectively.

A fundamental best practice is to maintain clear separation between the family’s personal finances and the business’s financial matters. This separation becomes all the more important as both entities grow. Proper accounting and financial management reporting systems should be put in place to prevent intermingling of funds and assets. The ability to separate personal assets from the business often allows for more independent oversight and helps ensure that funds are being used for the intended purposes. It therefore adds a layer of protection versus having co-mingled business and personal funds.

A fundamental best practice is to maintain clear separation between the family’s personal finances and the business’s financial matters.

3. Implement robust risk management strategies

Embedding a family office within the core operating business introduces additional layers of complexity and risk, and developing and implementing robust risk management strategies is paramount. This entails identifying potential risks, both internal and external, and creating contingency plans to mitigate their impact.

Legal safeguards, adequate insurance coverage, strong cybersecurity, and a proactive and ongoing approach to risk assessment contribute to the overall resilience of the family office and the business. The best practices here, and many others, also support and strengthen family office risk management efforts.

4. Embrace succession planning

Succession planning helps ensure the longevity and prosperity of a family office within a business. Establishing a clear plan for the transition of leadership and ownership helps prevent disruption and maintain continuity. Succession planning isn’t a once-and-done activity; the process should be performed regularly and take into account changes in the family, business circumstances, and evolving goals of both the family and the business. At minimum, the succession plan should be reviewed annually to ensure the wishes and needs of the family are still being met by the current plan.

5. Foster transparency, open communication, and collaboration

Transparency and open communication are vital components of a well-functioning family office. Regularly scheduled family meetings and reporting on the business’s financial performance help ensure all stakeholders are informed. Maintaining an environment where family members can express their concerns and provide input fosters a sense of involvement and shared responsibility.

Encourage collaboration and teamwork between family members and the business’s professional staff. A collaborative culture leverages individuals’ strengths, promotes innovation, and enhances the overall efficiency of the family office. Regular team-building activities, training sessions, and a supportive work environment contribute to an engaging and productive atmosphere.

6. Stay adaptable and up to date on emerging trends

The business environment is dynamic, and external factors can influence the success of the family office and the core operating business. Remaining adaptable and responsive to changes in the economic, regulatory, and technological environment is key. Regularly reassess the family’s financial and wealth management goals, the business’s market positioning, and the overall strategy and structure of the family office in light of emerging trends.

Watch for these key family office trends:

Leveraging technology and artificial intelligence to enhance efficiency

From artificial intelligence (AI) and virtual assistants to sophisticated wealth management platforms and user-friendly data analytics tools, technology is streamlining formerly cumbersome processes, enhancing decision-making, and providing families with real-time insights into their financial portfolios.

Embracing technology innovations that offer added capabilities helps the family office continually improve efficiencies and remain agile. But as the use of this technology scales up for family offices, so too must overall cybersecurity measures, risk management, and data management processes. The family office governance structure should address how the embedded family office evaluates technology needs, selects software and hardware, and implements new tools.

A heightened focus on ESG and direct investment

Increasingly, families are incorporating environmental, social, and governance (ESG) considerations into their investment decisions to align their family office wealth management practices with broader societal and environmental goals. This trend reflects both a commitment to responsible investing and the growing desire among family members to make a positive impact through their financial activities.

Additionally, many families are building a direct investment function within the family office. This can offer greater control and flexibility, more opportunities to diversify, and in many cases income and estate tax optimization. A family office considering a direct investment function may want to consider further separating from the core operating business, and often, this involves a dedicated team and resources in place to fully support this function.

Engaging and educating multiple generations

As family offices transition across generations, families are responding with activities to engage, educate, and coach younger members. Structured programs for financial education, mentorship, and participation at an age-appropriate level in the family office operations ensure a smooth transfer of knowledge and responsibility. Engaging the next generation early helps foster a sense of ownership in managing both the family’s wealth and the associated business interests.

Robust cybersecurity measures

With increasing digitization of financial operations, family offices face heightened cybersecurity risks. While cyber risks will always be an ever-present threat to family offices, cybersecurity measures are often overlooked in practice. Protecting sensitive financial data and maintaining the confidentiality of family affairs are paramount, and it’s critical to implement strong cybersecurity measures. These include encryption, secure communication channels, limiting access to data, and regular audits to safeguard the integrity of the family office and core business operations.

Flexibility in governance structures

Successful embedded family offices are adopting flexible, adaptive governance models that can accommodate changing family dynamics, business strategies, and unforeseen events. Adaptive models allow the family office to quickly and effectively respond to the unique needs and circumstances of the family and the business as they evolve.

Flexibility requires that family members and C-suite executives continually review the structure and operations of the embedded family office and question how functions can be performed more efficiently and effectively.

At some point, a family office might also consider separating from the core operating business entirely and into an aligned entity. This point differs for each office — and many family offices remain inside the business for their lifetime — but common signs include:

  • Wealth outside the business equals or exceeds business assets.
  • Family office investments diversify and grow more complex, requiring more structure, strategy, and resources from the core business. Similar to the direct investment function discussed above, as the assets become more complex and more resources are needed within the family office operations, many family offices will look to separate into a new entity.
  • Families grow, and a greater number of members work outside the business.
  • Family members become less involved in business operations and require more resources from a family office.

Family office future

The family office plays — and will continue to play — a pivotal role in managing the intersection of family wealth and business enterprises. To navigate a sustainable future, the embedded family office must continually review its existing model and operations. Is the present structure the best structure? Are all functions being performed efficiently and capably and without detracting from the core business? The embedded family office must ensure best practices are in place to adapt to changing circumstances with foresight and resilience as it works to serve the family and its mission.

The family office plays — and will continue to play — a pivotal role in managing the intersection of family wealth and business enterprises.

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