Family Office, what animal is this?

Ricardo Rodil | Managing Partner of Capital Markets

In this brief insight, we are not going to talk about large family businesses, such as Magazine Luiza, for example. Our interest will be centered on the small and medium-sized Family Office.

You, owner of a medium-sized family business, tell me: have you ever seen any other entrepreneur complain that they don't have succession within the family to run the company? And someone complaining that family disagreements are always negatively reflected in business performance? And another who can't settle their son and son-in-law's fight over who gets to sit in the CFO chair? The “soap opera” seems familiar. The good news is that I am going to give you some “guesses” that can help in these (and many other) circumstances routinely faced by family businesses in Brazil – and around the world. The bad news is that there is no silver bullet to come up with, only procedures to minimize damage and ensure nothing is harmed.

And now let's talk about the “animal” in the title: the so-called Family Office. First of all, it is good to mention that this name has become popular to designate a series of procedures aimed at minimizing the impact of risks brought about by the type of problems mentioned in the previous paragraph and which so hinder the smooth running of family businesses. In fact, the expression Family Office came up with a more restricted meaning, to refer to offices specialized in advising family groups. These offices are of the handyman type and are usually led by professionals with extensive experience in business, financial, legal, accounting and investment matters.

But let's broaden the view a little. From my experience, the problems in family businesses are concentrated in the following areas: family relations issues, issues related to the ownership of the companies, aspects relating to the conduct of business, problems in the succession of companies and financial and investment issues. Many of these subjects are usually intertwined, and it is not very easy to distinguish the limits between them and the degree of influence of each one. For didactic purposes, let's try to analyze them separately:

Family relationships: family issues (obviously, especially disagreements) tend to interfere with conducting business and making decisions that only take into account the interest of the companies and their growth, profitability and continuity.

Proposed solutions: (i) create some kind of collegiate, which can be called family assembly, family council and which should include some third party, to operate as conciliator or mediator; (ii) establish a strategic agenda for the family, aimed at reconciling the various interests and aligning them with the interests of the company(ies); and (iii) specific family meetings to deal with the themes of the company(ies), preferably led by a mediator.

Ownership of the company(ies): closely linked with the theme of succession within the family, the most common questions concern the concept of fairness in the shareholding that each one is entitled to, frequently linked to the discussion about who contributed most to the creation and growth of the company and who, logically, would be entitled to a greater participation.

Proposed solutions: (i) shareholders' meetings may determine the criteria for these assignments; (ii) the statute or the articles of association, if well prepared under the care of an experienced professional, can establish fair rules; and (iii) shareholders' agreements can elaborate guidelines that come to be accepted by all.

Conducting business: here are concentrated the problems and discussions that seem to be more difficult to solve and that tend to have a more serious impact on the activities of the company(ies), as often each individual feels as if he or she has the solutions and more appropriate ideas regarding the conduct of business.

Proposed solutions: (i) set up a robust corporate governance structure, which allows well-defined lines of decisions to be followed, as long as the processes are not “immobilized”; (ii) create firm compliance rules in the areas of legal, regulatory, tax and environmental matters; and (iii) create, implement and operate robust internal control systems. Again, the intervention of experienced professionals to guide these processes is highly recommended.

Succession: disagreements about succession in corporate management positions are perhaps the most frequently encountered in reality and can have a devastating effect on the conduct of social business.

Proposed solutions: (i) have clear definitions about the structure and roles of each one; (ii) set up and operate a performance appraisal system that is as objective as possible; and (iii) encourage family members who are interested in running the business to follow university or specialization courses that will qualify them for their future roles in the company(ies).

Financial and investment issues: these issues are usually related to the remuneration of family members who work in the organization and those who simply hold equity interests and receive profits or dividends.

Proposed solutions: (i) include these aspects in the bylaws, contracts or shareholders'/quotaholder agreements; (ii) conduct the remuneration system according to functions, in accordance with the aforementioned performance evaluation system; (iii) leave an “open door” for those shareholders/shareholders who wish to enter the organization's management structure and (iv) establish very clear rules regarding the reinvestment of profits, so as not to harm those who are only shareholders /shareholders.

In conclusion, running a business can bring many challenges. The existence of numerous successful family organizations that are examples of growth and governance shows us that just as there are problems, there are also ways forward. The most important factor is to create a culture of seeking support from experienced professionals who can help overcome obstacles, both in family relationships and in business.