Paths to Keep Wealth in Family Hands
The entrepreneurial culture of a family business, as well as the entrepreneurial profile and experience of senior management, are factors that enable a family firm to set up a family office in order to manage its investments and branch out into new business activities.
This is one of the key findings of research by IESE’s Juan Roure and Juan Luis Segurado writing in the article "Paths to Keep Wealth in Family Hands," which appears in the current issue of IESE Insight magazine.
Family offices manage and administer a family firm’s portfolio of investments. They also provide a broader range of services – from training and mentoring to tax management and succession planning.
Setting up a family office to deal with financial planning and investments can make good business sense, especially in the current climate. The erosion of trust in financial systems since the onset of the global economic crisis has driven many family businesses to take direct control of their investments, and a family office serves as the perfect vehicle to nurture as well as supervise the entrepreneurial endeavors of the next generation in a systematic way.
Paths to a Family Office
How do family offices come about, and what is the best way to organize them?
Roure and Segurado, both members of IESE’s Business Angels and Family Offices Network, studied 32 family business cases from the United States and Spain that had revenues of more than 25 million euros or family wealth exceeding 20 million euros. They identified six implementation and development paths that family members employ to manage and govern their offices.
Some are prompted to do so through diversification. Other times, the death of the company founder may result in the sale of the main family business and the transferal of assets to different family members, who may later seek out joint investment opportunities through an office. Sometimes family conflicts or a liquidity event will condition whether family members seek an office to make collective investments or decide to go it alone.
The Importance of Entrepreneurial Values
As with any new business or start-up, launching a family office requires an entrepreneurial approach and attitude, which can be divided into three stages:
If family members have strong entrepreneurial values and dispositions, they are more likely to engage in opportunity-seeking behavior, which will make it easier for them to reach consensus on joint investment strategies through an office.
Family offices can also be used to mentor younger generations in entrepreneurship, involving them in proposed changes to the company’s business plan and financing that would affect the management of the family’s wealth over future generations.
With an estimated 4,500 to 6,000 family offices worldwide – and perhaps another 6,000 operating informally as such as part of private businesses, many family-owned, in the United States, Europe and Asia – this is an area of growing interest worth monitoring.
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