Family Office – Constructing a Business Plan
After the family has determined its vision of the family office, the next phase can be described as the design phase, during which a detailed business plan is developed. This should include the choice of the most suitable jurisdiction, services provided, staff requirements, office location and infrastructure, anticipated capital, breakdown of operating costs, measurable benchmarks, and funding to be used.
One of the underlying determinants of the business plan and the family office is the question of whether the family office will be run as a profit center or as a cost center. It is equally important to determine whether there is any intention to open up the family office to other families as a multi-family office at a later stage, or if it is clearly intended to continue delivering services just for the founding family.
Other important factors to take into consideration when creating the business plan of a family office include:
An important question is: do some family members have the right skills and qualifications to run the family office, or will external management be hired? When this decision has been made, the right level of family governance must be implemented to deal with the tension between principals and agents in the appropriate way (see section on the internal-external conflict). An investment committee or a supervisory board with family representation is usually part of the envisaged governance structure.
Families that still own the family business and may be active managers in that business face distinctly different issues to those that have sold the business and are managing their private family wealth. In some cases, the company’s chief finance officer, legal counsel or controller advises the family on estate and investment issues; in others there may be an internal department in the family business that functions like a family office.
The Entrepreneur and the Family Business
Entrepreneurial risk-taking in the family business should not be confused or combined with the approach to risk for the separate private assets of the family. While a comprehensive approach to wealth management across both private and business assets is required, personal affairs should best be dealt with in a discrete entity separate from the business, in order to meet the distinct ownership needs of individual family members. The investment and risk profiles of the family and individual family members should not be overwhelmed by larger corporate priorities, although clearly a holistic approach to risk levels on both the business and private sides needs to be ensured.
The business plan should define the operating model of the family office, its functional setup and infrastructure, reporting and control systems, and the governance structure – including setting up relevant boards, such as the investment committee or the family council.
Another factor to be considered is the optimal jurisdiction and tax regime for the family office, based principally on the home jurisdiction of the family and the majority of its assets.
The most important make-or-buy decisions need to be made by looking at the potential savings if certain services are outsourced, and judging the opportunity costs of outsourcing as against sourcing in-house (see section on determining servicing priorities: the make-or-buy dilemma). A detailed staffing plan must be created, and a salary structure put in place that provides sufficient motivation for talented staff to work in the family office. Key positions, such as CEO (unless held by a family member), CIO or tax adviser must be filled by knowledgeable and trustworthy individuals. Another major area requiring decisions is infrastructure, including the office and IT infrastructure (see section IT, trading, tools and platforms).
The result of the design phase, in which the business plan is prepared, should be a concrete action plan to build and set up the family office. All the relevant family members should be asked to commit in writing to the establishment of the office.
Alongside financial projections, the business plan also needs to provide short-term and long-term timelines, and detailed job descriptions and performance goals for employees.
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