FAMILY OFFICE The Key to Sustainable Family Business Wealth (Part 2)

“Today, someone is sitting in the shade because someone planted a tree long ago.” [1]

Warren Buffett

After we have learned the basics of Family Office, what it is, how it is beneficial to family businesses, how many types there are, and what kind of family business each type is suitable for, we will continue to set important policies and make Family Offices really happen.

Policy 1: Create a balance between “professionalism” and “family”.

One of the key challenges of running a Family Office is balancing professional operations with maintaining family relationships. This can only be achieved if the Family Office has the following characteristics:

1. Draw a line between “owners” and “workers”. By appointing professional staff in the Family Office, such as investment managers and legal advisors, instead of using family members, without taking over, but using clear policies to direct the work, which will help business decisions to be made efficiently and help reduce the problem of "fear" between each other.

2. Create continuous communication mechanisms. By having the Family Office be responsible for organizing various family meetings, especially meetings specified in the “Family Charter”, such as family council meetings or business board meetings, etc., which will prevent the Family Charter from being just a “shelf document” that is never put into practice.

3. It is a tangible form of serious corporate management. Behavior is difficult to change, especially family behavior that has become an organizational culture. Establishing a tangible organization like a Family Office will create a new structure that will help change the old behavior of members to follow the family rules.

Many families have used the Family Office to drive the enforcement of the “Family Charter” to create real changes. So, it is not surprising that you may be wondering, “Even though we have a family charter, there is still no change, but the family members still behave the same way?” That means you may need a family office to drive change.

Policy 2: Transforming the company from routine work to a mission of “creating a sustainable legacy”

Managing a “family clan” seems to be a boring task that no one in the family wants to do. Part of the problem comes from the fact that families tend to view managing a family clan as just accounting for assets, income, and expenses related to the family’s common assets, which seems like a boring and valueless accounting task. However, if the family changes its focus from “routine work” to “creating a sustainable legacy”, which is a current trend, we will see that this mission has become an important family mission that can impact both the business and the family, as well as the society of which they are a part.

“Gongsi Management” Therefore, it is a mission worth investing time, effort and effort to achieve the goal. Making the clan a “lasting legacy” for the family can be done by:

• Diversification of investment risk of the company Because the family is everyone's property, investing with family money must prioritize the safety of the principal. It is good to get interest, but the principal must be intact. A low-risk investment strategy with good portfolio diversification is a strategy that will have little resistance.
• Investing for sustainability Some investments may not be aimed at monetary benefits or direct family benefits, but are social investments. The Family Office can promote investment in businesses that have a positive impact on the community or society, such as investment in clean energy, environmental conservation and restoration, or projects to solve various social problems. The amount of investment is clearly agreed upon among the family.
• Promoting shared family values Finding and recording “Family Values” will help the new generation to have a guideline for managing assets that is consistent with the values ​​that the family holds together, like the “North Star” that everyone holds onto when making decisions about various matters of the clan.
• Family Youth Development Educating and training the younger generation on wealth management and their role in the family business is another important factor in ensuring the sustainability of the family business. Without the necessary knowledge and skills to manage the family business, there is a high chance that the family wealth will be lost.

The mission of transforming the clan into a lasting legacy not only ensures a good quality of life for members from generation to generation, but also brings “pride” to the family as a part of helping society improve.

5 steps to successfully set up a Family Office

Setting up a successful Family Office is challenging because it requires both financial resources and the approval of family members. The path to success involves at least five steps, as follows:

1. Talk clearly about "wanting to have a family business".

The establishment of a Family Office should start with the joint determination of family goals. The most important question in this matter is, “Do we still want to have a joint family office?” Because if we agree that we do not want to have a family office, it is useless to set up a Family Office, wasting time and money. However, if we still want to have a joint family office, or due to certain necessities, such as there are still jointly held assets that cannot be separated or divided, or there are still shares in the company that are jointly held, in such cases, it is a reason to establish a Family Office as a matter of course.

In addition, whether it is wealth preservation, asset growth or charitable management, the needs of each family member should be taken into account to ensure that management is carried out in the same direction.

2. Set common rules for the company.

Is it necessary to have a Family Constitution before setting up a Family Office? The answer is “not necessary”. However, having a Family Constitution will make setting up or using the Family Office service easier because in the process of making a Family Constitution, there will be discussions about “the common goals of the members” and “the joint management guidelines of the family business”. However, if the family does not have a Family Constitution yet, there are 3 important questions that are recommended for members to discuss first, as follows:

1) What is the purpose of a company? – The family must be clear about what aspects of the family office they want the Family Office to manage, such as helping manage investments, managing taxes, or helping look after inheritance, etc.

2) Where will the company's income for expenses come from? – In setting up a Family Office, the operating costs incurred must also be taken into account, and managing income and expenses to balance each other is an important task for a family office.

3) Who has what duties in the company and is there any compensation? – The matter of duties towards the family must be clearly discussed to avoid the occurrence of “non-business” and “non-duty”. The matter of compensation must also be discussed at the same time.

3. Select a format Family Office that suits families

Once you have answered question 2, the only thing left to do is to choose which type of Family Office service you want to use – SFO, MFO or VFO – with the type of service, service fee and level of privacy being the deciding factors (read more in PART I of the Family Office article). There are also legal issues to consider, such as setting up a company, association, foundation or trust to gain tax benefits and comprehensive family asset protection.

4. Select the team and experts that “click”.

Family Offices require teams with expertise in a variety of areas, such as investments, finance, legal, and accounting. Families should consider whether to hire internally or bring in external personnel for their SFO, or select an MFO family office with the right staffing for their needs, or perhaps select a specialist from the VFO pool that best meets the family’s needs.

5. Communicate and hold regular family meetings.

Open and transparent communication between family members is essential to keep everyone informed of decisions and progress of the family office management. Regular family meetings keep all family members informed of the current status of the family office, facilitate smooth operations of the Family Office, and directly reduce family conflicts.

“Family clan” It's not just assets that need to be managed, but the foundation of relationships and wealth that are passed down from generation to generation. Creating a Family Office is more than just managing assets, but creating a system that will help the family achieve common goals, communicate transparently, and grow together. Don't let the clan become a burden, but turn it into a lasting legacy that will be the pride of the family today and in the future.

References:

• The Economist Intelligence Unit, “Building legacies: Family business succession in South-east Asia”, 2014
• Adam Hayes, “What Is a Family Office and Do You Need One?”, Investopedia, Updated February 18, 2024
• Matthew F. Erskine, “Do You Need An SFO, MFO or VFO?”, Forbes, Updated January 12, 2022.

[1] “Someone's sitting in the shade today because someone planted a tree a long time ago.” —Warren Buffett