Families seeking to keep harmonious relations cannot assume that selling a business and taking the cash is going to ease potential arguments. This, and other points, were discussed by this news service recently with EY and its business area handling family offices and enterprises.

Families must think rather like operating companies in order to hold together during upheavals and remember that their internal disagreements don’t magically vanish once a business is sold, EY Americas says.

When a family with a business sells up, the potential for friction and dispute among family members can remain, albeit in different forms. Added to that, there’s the wrench of letting go of a firm and wondering what to do next, Bobby Stover, EY Americas’ family enterprise and office leader, told this news service in a recent interview.

“Families realise they have to be as good as operating companies when it comes to dealing with change,” Stover said. 

His firm notes that more than 60 per cent of family-owned business owners want to shift ownership to the next generation because of old age, changing market dynamics and Covid-19. No wonder advisors who can guide families through the process are in demand.

Stover argues that EY is the first “Big 4” accountancy firm to have a management consultancy focused totally on the single-family office – signaling how the FO's profile has risen in recent years. 

As the single-family office sector has matured, services aimed at them have evolved. It is now an area of increased business school and academic focus (see an interview here with Silicon Valley Bank’s Bill Woodson on how this is happening). There is a cluster of family office network groups, as well as organizations such as the UHNW Institute, based in the US, with which Family Wealth Report is exclusive media partner.

Risks
At present, the major risks family offices face are enterprise risks and the challenge of more disruptions; others are regulatory and geopolitical risks, Stover said. 

EY spends time with clients trying to design family offices, including advising whether an FO is the right structure for them in the first place.

Stover said that EY has a way of working out whether a family has enough wealth to justify having a family office. 

“We actually use a process to drive this decision – asset size is not always the driver of whether someone needs or can afford a family office to do it profitably; in many cases there are factors like privacy that override cost,” he said. “We focus on `what will the office do’ and `who will it do it for [whom]’ and `what is important to the family as non-cost drivers’, which then informs the decision.  Another important point is that as the world continues to change rapidly and technology gets better, most family offices will be a combination of in-source and out-source if they want access to best-in-class going forward,” he said. 

Asked what sort of governance worries crop up, Stover gave the following examples: “Increasing number of inactive shareholders/owners/beneficiaries; uncoordinated financial demands on business and investment profits; unclear boundaries between family, owners, and business; lack of non-financial capital development of the family; and inadequate operating business governance or oversight (formal boards, qualified management etc.).

There are also several “elephants in the room” that families cannot ignore, such as death, divorce or dependency; poor trustee relationships with beneficiaries; a lack of generational transition process; unresolved family conflicts; shortages of talent and succession planning problems; and failing to prepare for economic and political upheaval.

Room for growth
The US has the world’s largest family offices market; there are an estimated 6,500 families with a net value each of $250 million or more out of a global total of about 18,000. But Stover said that the market is not saturated. “We have actually seen an uptick in the number of single-family offices in many shapes and forms,” he said.