From Family Business to Family Office

STEP INSIDE

By Caroline Rhéaume, tax lawyer, TEP, Chair STEP Montreal
By Hélène Latreille, TEP, Vice-Chair, STEP Montreal Business Families Special Interest Group
Over recent years, we have seen an increased interest in Canada for information relating to the Family Office concept and the Multi-Family Office. Business owners who have sold their business or are about to are looking for options to manage their wealth in a very unique way. Professionals, financial institutions, academics, all have their own definition of what a Family Office is. But, what is it exactly, and what is the landscape of the Family Office in Canada? This article discusses the evolution of the Family Office in Canada and the different challenges families will be confronted with over the years to ensure their sustainability and maintain the harmony within the group as they transfer from one generation to the next.

What is a Family Office?
At the root, a Family Office is an entity, often a holding company that manages the patrimony of a single wealthy family. The purpose is to centralize the management of the family assets and effectively transfer the family wealth across generations. As a general rule, a family would need a net worth of over $100 M to support the costs of the Family Office. Some families who already have a Family Office in place believe that such a structure can be viable with a net worth of $50 M.

The Family Office provides the family with professional unbiased advice on:

• Investment management, including private equity;
• Estate planning, including wills, powers of attorney, mandates, trusts;
• Financial planning;
• Tax planning;
• Insurance needs;
• Family governance;
• Philanthropy.

Some families are known to use all of these services, whereas others will only use some of them. The Family Office will also provide day-to-day accounting and payroll activities and help with property management.

For some, the Family Office was initially started parallel to the operating Family Business. For others, the constitution of the Family Office followed the sale of a Family Business.
So why would a family consider going through the demanding process of creating a Family Office?

The main reasons are generally to preserve the “family unity and family values”, and to have access to personalized services, customized to the family’s needs and goals.

Most Family Offices will have at least one family member involved in the daily operations and management. However, they will generally hire external resources to help with investment management and finance.

With most families, being handed the privilege of managing the Family Office has to be earned from generation to generation. The responsibility is not handed down automatically. The members of the next generation wishing to take on the role as either President or Chief Financial Officer have to show their capability to carry on with the same Mission Statement and strong Governance. Over the years, they will be doubly challenged to provide for the demands made by the increasing family circle while maintaining the same standard of lifestyle for the added generations.

In most cases, the Chief Financial Officer will be hired externally to work with the elected managing family members. This third party will also help in managing conflicts between family members and between the existing generations. Where the Family Office stems from a Family Business, it is not uncommon to see the operating company’s accountant be asked to join the Family Office, as Chief Financial Officer. This choice seems natural, as he is already familiar with some if not all of the company’s management and has experience in dealing with the different personalities of the family.

Although Family Offices differ in their structure, they tend to have common values and guidelines:

• The family must come first and foremost, before everything else;
• The importance of hiring people who share the same family values;
• The family should be involved in the management of the family’s wealth; the responsibilities and decisions should not be left solely with non-family members;
• Each family member must exercise respect for the others, even those not directly involved in the management of the family operations;
• To be the best at managing the family’s wealth and to be cost effective, otherwise, family members may choose to break away and seek their own independent advice;
• To include philanthropy as part of the family mission.

One challenge that most Family Offices must face is: how to secure wealth for existing family members and their descendants for years to come?

Relying solely on the stock market does not seem to be an option. Investments in real estate and private equity are quite common. For some, starting a new operating business appears to be the solution over time. In European countries, many families go from having an operating business, to selling the Family Business and managing a Family Office, to buying a new business, and selling it to reinvest the proceeds in the Family Office. This option is also considered in Canada. In fact, many Canadian wealthy families still have an operating business while having their own Family Office. Dividends received from the business may help maintain the standard of living for the family.

Inviting other wealthy families to join an existing Family Office is another avenue being explored. The Family Office then becomes a Multi-Family Office. This could help defray the operating costs and create a new business venture for the Family Office. The Multi-Family Office allows wealthy families who do not have the required net worth to create their own structure, to enjoy the benefits of the Family Office luxury. However, this option raises compliance issues if the Family Office manages other people’s money, as well as conflict of interest issues, to only name these two.

The future of Family Offices in Canada

In the United States, and in Europe in particular, wealthy families have a long history of the family concept.

In Canada, we have a few Family Offices which are already at their 6th and even 7th generation. As more wealth is being created, we should see more families gathering their assets to secure a stronger financial position. Yet, the Family Office is still fairly unknown and it is greatly misunderstood and misinterpreted. Some professionals offering a single service may wrongly classify themselves as being a Family Office or Multi-Family Office, while in fact, they should identify themselves as catering to a specific service for the FO or MFO.

As the Family Office deals with private family matters, in Canada, very little information is being shared openly, as compared to the US and Europe, where certain platforms gather families to share their knowledge, experiences and ideas for the next generations to move forward stronger and more competitively.

These gatherings also offer guidelines for the families seeking to create their own structure. Sharing some of the good and not so good experiences they have encountered over the years in putting together their FO is a priceless source of knowledge that can benefit families wishing to learn more before deciding if this is the right structure for them.

In Conclusion

Statistics show that within 10 years, a very large number of Canadian companies will be sold as the next generation does not intend to carry on the Family Business. This may lead to an important growth of Family Offices or, in some cases, of Multi-Family Offices. As new wealth is realized over the next decade, the TEP will have an important role to play in counseling and educating the families of the future Family Offices and Multi-Family Offices to be created.