How to manage the shift from owner to investor

By Steve Thorne


The decision to sell your business was a difficult one. Yet the timing was right, you found the right steward to buy your company and negotiated an exit that met the needs of your family. Now it's time to look ahead so you can enjoy the fruits of your labor in a way that makes the next chapter of life as rewarding as the prior one.

Redirecting the family's focus from the business to another meaningful pursuit is a high priority for many sellers. Numerous options exist to smooth the transition.

Adjusting to a liquidity event

A significant liquidity event need not be destabilizing. The business owner and his or her family often retain ongoing leadership roles at the company, particularly when they maintain a meaningful ownership stake in the business. This is best accomplished by selling your company to a buyer who values your involvement and encourages you to maintain ownership.

The family should acclimate to its newly liquid wealth over time to prevent the kind of radical changes in lifestyle that can occur with sudden wealth. This usually involves restricting access by younger family members to the sale proceeds. One way to do this is by contributing the sale proceeds to family investment partnerships with redemption restrictions. Another strategy is to keep proceeds in the legal entity and make distributions over time.

In a situation in which proceeds are distributed at the time of a sale, many families find it is better to put the pieces back together by creating a family office. This will allow the shareholders to jointly reinvest the proceeds in an organized and cohesive manner. A family office can also be a vehicle to pursue business and philanthropic activities and provide support to family members.

Running a family office

Family offices come in all shapes and sizes, and no single solution is best for everyone. Identifying the right type of family office depends on factors including the magnitude of the sale proceeds, the number of family members and trusts established for their benefit, and the willingness of the business owner to manage the people and resources necessary to form a family office.

Families may choose to form their own captive family office, known as a "single family office." It generally is cost-effective to do so when liquidity exceeds around $500 million or more. A single family office is usually a distinct legal entity formed to serve the needs of a single family as well as trusts established for their benefit.

Using a multi-family office may be a better solution when the cost of forming a single family office is not justified, or when the family simply does not want the hassle of hiring employees and managing a captive organization. Multi-family offices usually offer lower infrastructure costs by sharing resources. The tradeoff, of course, is just that. Resources are shared and so are not dedicated to a single family or family member. It is usually a good idea to figure out what services are going to be provided by the family office, and to whom, before deciding whether to form your own office or rely on a multi-family office instead.

Functions of a family office

Overseeing the investment of a family's assets is the most important function of a family office. The logical first responsibility of a newly formed family office is to create an investment strategy for family members and entities served by the office, usually embodied by the development of investment policy statements that dictate asset allocation. Once this is done, the next step is identifying and gaining access to best-in-class investment managers. Options to be considered include hiring external third-party investment managers and creating an internal team to direct the family's investments.

The choice of whether to bring investment expertise in-house or to use outside managers is often determined based on the size of the family's asset pool. Families with less than $500 million of assets or those wishing to maintain a simple family office structure typically outsource the investment management function. This is the most straightforward option, as outside managers already have the infrastructure, investment discipline, and policies and procedures in place for this purpose.

Some families with a sizeable asset base prefer to establish a captive, internal investment effort. This requires a significant financial commitment from the family, in part because high-quality investment professionals command a high salary, including a portion of their compensation based on portfolio performance. The advantages of an internal investment management function include added flexibility and a highly customizable approach to investing that is carefully tailored to fit the risk profile of each investor.

In addition to implementing an investment strategy and monitoring investment performance, many family offices oversee the family's philanthropic efforts. Creation and administration of a private family foundation—frequently embedded within a family office—is a wonderful way to jump-start your post-sale career and give back to the community. A private family foundation is often formed with a specific purpose or objective in mind, using the collective resources of the family to effect real change by supporting a handful of specific causes.

Aside from investments, family offices usually oversee tax and legal services for the family, plan estates and manage personal real estate. They also frequently perform concierge services such as arranging travel, maintaining personal assets, managing household help and paying bills.

On to new business—the family bank

Many family business owners have motivated children who aspire to be entrepreneurs themselves. An additional feature of the family office is to establish and oversee a "family bank," which provides funding for new business ventures without simply throwing a pile of cash at a new business.

A family bank is a legal entity formed to lend money to family members for appropriate business opportunities. The family bank usually requires creation of a thoroughly vetted business plan before initial or subsequent funds are advanced. Such a structure enables the business owner to encourage entrepreneurial behavior but also dissuades younger family members from diving headfirst into a business venture without sufficient planning and preparation. While a family bank will typically advance funds on more favorable terms than a commercial lender and without the usual collateral requirements, the mere fact that the funds are loaned results in family members giving new business ventures their undivided attention.

Key decisions

The establishment of a successful family office requires forethought and planning. Thinking through in advance whom the office will serve and what services will be provided will allow the family to properly size and staff the office. Giving top priority to the investment function will allow the family to create a value proposition for the office predicated on the economies of scale of investing together.

From there, the family should focus on the desired level of service and how to deliver it in the most efficient manner. When establishing a family office, you must determine up front what services will and will not be provided by the office as well as how the family office will be funded. This helps prevent any one family member from monopolizing the limited resources of the office. Charging family members and family entities based on their use of the family office is one effective way to control this. It is usually a good idea to start small, with just a few key employees, and then expand the office gradually as more services are brought in house.

In time, the successful family office will address ownership, governance and succession issues. When done right, this will enable the office to survive the founder and serve future generations of the family. Good governance usually starts by encouraging younger family members to take an active role in managing the office and participating in major decisions. This can evolve into the creation of a board of directors including multiple generations and representatives from various branches of the family. Ownership of the office, which almost always starts in the hands of the business owner, should also be transitioned over time to the next generation as their responsibilities increase and they mature.

Planning for the future

The sale of the family business should be the ultimate fulfillment of the owners' dream. But for this to be true, careful planning is required, both before and after the sale, to ensure that the legacy of the business and the owner continue in a meaningful way. Creation and use of a family office is one way to achieve this goal, as it can keep the keep the family's assets together and serve as a mechanism to redirect the family's efforts after the business is sold.

Steve Thorne is a retired partner of Deloitte Tax and former head of Deloitte's Family Wealth Planning and Family Office practices in the Chicago office (

Copyright 2015 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact

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March/April 2015

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