Family run businesses often require individuals to set-up family offices that would help in managing their companies. This has led to the increase in family office model adoption as family ran business strive for benefits similar to those gained by formal business offices. Family offices help in preserving the interest of the family in business operations, wealth generated from the family’s investment need to be protected for the good of the current and future generations. Wealthy families often need family offices to provide a clear managerial role of the family operated business. This also helps in preventing family feuds as the family office can provide a template for effective distribution of wealth and roles (Rosplock N.p). In this paper, the researcher will discuss some of the benefits and downsides of operating family offices.
Shifting operations of business to a formal like family office can lead to significant gains to both the business as an independent entity and the family. The following benefits are accrued from operating as family office.
Operating a family office helps in improving transparency of business activities for internal and external compliance with the family principles and market regulations. Operating a family office can help families keep a good record of all the financial transactions, this can help in ensuring that the family files their tax returns with ease (Wessel 17). Well-kept financial records can help families are not charged with tax evasion. Keeping good records ensures that the information generated from operations can be used to better the profits from family investments. Transparency in the operation of family businesses and investments prevents internal feuds between family members.
Owning a family office can help in improving the confidentiality of the families financial information. A family office provides a central point for controlling access to information for external companies who get into contracts with the family business or employed staff members. The family office can generate access rights for each tier of employed personnel with appropriate security levels.
Operating a family office can also help in aligning the goals of the family with those of the business. A family office can ensure that better decision making by ensuring that the priorities of each family member are reviewed and aligned with the overall financial goals of the family (Hughes 44).
Better Decision Making
Family offices generate holistic information on the different operations ran by the family, the information can be used in making informed decisions that ensure continued growth.
Pooling Of Resources
Family offices can allow families to pool all the resources from different operations for better investment and cost management. Operational cost such as advertising for different business can be pooled together and leveraged for better quality services. The better purchasing power that accrues to the family from pooling their resources can also ensure competitive prices.
A common case that is seen in wealthy families is the lack of a clear indication of their wealth and assets. A family office can help in keeping a detailed record of the assets owned by a family; this would help in reducing the chances of losing properties.
Operating a family office can help the family employ talented individuals who will improve the financial prospects of their investments. A formal family office presents a platform for hiring talented individuals who have the appropriate skills to further their business (Wessel, np). Skilled personnel often require a formal structure to put their skills to the test, contemporary family business do not have such a structure.
Operating a family office also comes with the following disadvantages:
The cost of setting up a family office can be prohibitive due to the high upfront cost. The family might also be forced to wait for a considerable time for their business to realize the full benefits of operating a family office (Acher 160). The high cost is often associated with the procurement of office space and materials as well as cost of hiring support staff.
While we have argued that confidentiality is improved in the above section of the paper. An instance where operating a family office can compromise privacy is the occurrence of an information leak. Given the now centralized system of strong information underpinned by family office operations, a leak could lead to exposure of significant amount of crucial information
Family offices lacks the formal business principles and company regulations present in the contemporary business environment. Consequently, it becomes a priority for the family to hire trustworthy professionals to run some of the functions of the family office. Finding trustworthy individuals with the appropriate skill set required to run the office can be a challenge.
Family offices serve a number of functions with the aim of improving the management of family businesses and wealth. The major benefits of operating a family office include better planning for future generations, ensuring social responsibility of the family operated business, better management of risks, smooth transfer of wealth, aligning the needs of all the family members, and providing platform for administrative and management duties for all the constituent business operations. On the other hand, the major disadvantages include limited privacy in case of a leak, high initial costs. The increased growth of family offices around the globe is underpinned by the benefits accrued from operating a family office which out weight the disadvantages. This leaves the idea more viable.
- Archer, Clare. Family Offices – the Step Handbook for Advisers. , 2015. Print.
- Wessel, Stephan. Goals, Control and Conflicts in Family Offices [recurso Electrónico]: A Conceptual and In-Depth Qualitative Study. , 2013. Internet resource.
- Hughes, James E. Family Wealth: Keeping It in the Family – How Family Members and Their Advisers Preserve Human, Intellectual, and Financial Assets for Generations. Wiley & Sons, Incorporated, John, 2017. Print.
- Rosplock, Kirby. The Family Office Handbook: A Guide for Affluent Families and the Advisers Who Serve Them. , 2013. Internet resource.
- Rosplock, Kirby. The Complete Direct Investing Handbook: A Guide for Family Offices, Qualified Purchasers, and Accredited Investors. , 2017. Internet resource.