Designated Survivor – or the importance of having an emergency board plan

Some people accuse me of being a ‘stuck record’.  I keep endlessly repeating the same points and asking the same questions over and over again.

Despite accusations that this is due to memory lapse associated with old age, the truth is that I keep repeating myself because the messages are important, and many people simply don’t get them.

One of my questions is this:

“As a family business, you probably consider a strategic plan, a budget, and a marketing plan as business imperatives.  But what about your business succession plan?  That’s just as important.  Do you have one?”

My blog article this month is to confess that there is one more plan that needs to be added to that list, the emergency board plan (or EBP).  The article is inspired by an excellent piece written for the STEP Journal by Hayden Bailey, Partner at the London law firm, Boodle Hatfield.

In my work, I spend a lot of time focusing on the long-term impacts on family business of the retirement or death of the founder.  These are essential questions.  However, Hayden’s excellent article also reminds us not to forget about the short-term impacts.

This is especially relevant in the CEE region where many family businesses are tightly controlled by the original founder from the 1990s who also usually has a very ‘hands-on’ approach to the business.  The founder exercises absolute control over the business and makes all the important decisions.  That is perfectly fine – and in fact for many of my clients, it is an essential part of how their world functions.  It is often also a question of trust.  “I can’t trust anyone but myself to do this.”

But what then happens when the founder is suddenly and unexpectedly unavailable? This can be because of death, but it is more likely to be a result of health issues.  It can be temporary, for example in the case of hospitalization, or it can also be permanent.  In my experience, when this happens there is an initial period of total business paralysis.  Nobody really knows what to do, key projects grind to a halt, important and necessary decisions are not made, opportunities are missed, and unnecessary costs are incurred.

This is why an EBP is an essential part of the wider succession planning process.

What is an EBP?

A business succession plan sets out the steps to be taken to ensure the long-term continuity, management, and control of your family business.  In contrast, the EBP is designed to provide a way for the founder to decide the immediate things that should happen.  This can include:

Announcement

How to manage the announcement of the death or incapacity, both internally and externally.  Who should be told? (Consider key customers and suppliers, external lawyers, banks, and other stakeholders)

Legal Authority to Act

Who has legal authority to manage the business in the short term? There needs to be someone, or more likely some small ‘committee’ that is able to meet at the earliest opportunity to deal with high-priority day-to-day management issues such as bank loans, financing, debt management, cash‑flow issues, and bank‑signing authority. (It is very important that the necessary legal authorities to act are set up in advance – as by the time the problem arises it will be too late).

Shorter-term strategic  

The plan can name trusted friends or advisors who can be brought in to ‘steady the ship’ in the interim period before the longer-term business succession solutions kick in or the founder recovers.  If you have an Advisory Board and/or Family Council, what role do they play here?  (Families often play an essential role in longer-term solutions, but you need to bear in mind that in the immediate aftermath of an event like this, their capacity to act can be limited).  This group needs to deal with the bigger issues and ensure that nothing important is missed or lost. Key issues include the status of ongoing transactions, negotiations, and legal proceedings.  They also need to set a roadmap and identify which issues need to be dealt with in the next week, the next month, and until the founder returns or the longer-term succession solution kicks in.

Information

The plan should also set out a program for reporting to the family – including details of what should (and what should not) be shared, with whom, when, and how often.

If the succession plan includes a supervisor or Advisory Board, it is very important that they are also fully informed, not least so that they can make sure that whatever is happening is consistent with the founder’s wishes and vision.

So, an EBP is important.  For some families, this will be a chapter in a much larger long-term succession plan.  For other families it will be a separate document. The form of the plan is not so important.  What is important is that it exists.  As with business succession generally, failure to properly plan will inevitably lead to cost, conflict and, missed opportunities.

 

 

Image credit: Owen Blacker

 

 

 

A Victory for Common Sense

I am all in favour of eliminating Money Laundering and the financing of Terrorism, and I strongly support any sensible steps taken by the State to present the misuse of the financial system for these purposes.

Unfortunately, over recent years, the EU has started to go far beyond what is sensible, imposing a range of measures which in my opinion, have zero impact on criminals, but have a hugely negative effect on innocent individuals and families as they seek to go about their legitimate business. In many cases, the rules are just downright silly.

It is also interesting to keep in mind the protections provided to us all by the GDPR and the European Convention on Human Rights. The Convention says:

Article 8 – Right to respect for private and family life

1. Everyone has the right to respect for his private and family life, his home and his correspondence.

2. There shall be no interference by a public authority with the exercise of this right except such as is in accordance with the law and is necessary in a democratic society in the interests of national security, public safety or the economic well-being of the country

Despite these basic protections, the EU and the Czech State have imposed a number of rules around the Register of Beneficial Ownership which seem to directly conflict with those important rights. They argued that this interference with our fundamental rights was justified because it was proportionate and necessary.

I support the existence of a UBO register. It is important in preventing abuse of the system. The State, banks, and contractual parties have a logical interest in knowing who is behind companies and who they are really dealing with. Criminals must not be allowed to use companies to hide their criminal activities.

What I strongly disagree with is the extension of this system so that the private details of company shareholders and in some cases also trusts and foundations are exposed to public view, available not just to those with a legitimate interest, but to anyone at all.

‘Anyone at all’ includes your nosey next-door neighbours and other people with ill intent including gold diggers, blackmailers and scam artists. Thus, the state has been taking steps with the stated objective of preventing crime which have the actual effect of helping criminals. That’s not proportionate and nor is it necessary.

Thankfully, common sense has finally prevailed!

Last week, the Court of Justice of the European Union (CJEU) decided that the measures in the EU Fifth Anti-Money Laundering Directive (5AMLD) which require EU Member States to give the public unlimited access to their UBO registers are invalid because they breach privacy and data protection rights.

The CJEU said that the measures in 5AMLD go beyond what is necessary and proportionate. Making the register public enables a potentially unlimited number of persons to find out about the material and financial situation of a beneficial owner, and that information can never be recalled from the register. Making the register fully open to the public thus violates individuals’ privacy, it said, concluding that Member States must put appropriate safeguards in place to protect privacy in accordance with articles 7 and 8 of the Charter of Fundamental Rights of the European Union.

As a result of the judgment, Luxembourg and Holland have already suspended public access to their registers

I suppose Czech will follow soon (as the Czech State is now in effect in breach of GDPR!) and I hope that a renewed sense of common sense will apply to future AML measures.

STEP Conference on International Foundation Law

It was a great pleasure to speak again at this year’s STEP conference on International Foundation Law in Prague.
Thank you to Stepan Holub and ČAK – Česká advokátní komora for organising another great event. The conference was also co-sponsored by Asociace pro podporu a rozvoj svěřenských fondů, z. s. As usual, there was a fantastic range of international speakers and it was a very informative and useful day!

Seminar – Trusts for Business

I am delighted to be presenting at a seminar on using trusts for business purposes which will be held on 8 November.

In the Czech context, this is a fascinating topic. So far in CZ, trusts have been used almost exclusively to achieve family rather than business objectives.  However, I have already had the privilege of being involved in a small number of very successful Czech business structures using trusts.  They highlight a terrific opportunity.

Czech commercial lawyers have a set of tools to solve problems which were developed in ‘pre-trust’ history.  They know how to use those tools, and those tools usually work (more or less).  As a result, they are not always open to new solutions – even when those new solutions are better than the old ones.  It is also true that Czech law and Czech tax law can make using trusts challenging and that is sometimes used as an excuse to dismiss the idea completely.  However in reality it is possible to overcome many of these so-called problems.

My part of the seminar will look at how trusts are used internationally to achieve business objectives.  For each objective I will explore in detail at how it works internationally and then, together with participants, brainstorm how it could work here.  (Spoiler – some things do not work, some other things work really well).  Because this is unexplored territory, I do not promise to provide every answer.  I do promise to provide plenty of food for thought!

More details of the seminar – plus the registration link – are here.

What is a Family Office? (and what is not a Family Office)

Here’s another in my series of ‘Answers to Questions People ask me”

This month’s question is “What is a Family Office?”

While this sounds like an easy one, it’s not. Over the last decade ‘family office’ has emerged as a buzz-phrase. Wherever you look, you see family offices where before there were none. But these words describe all manner of different things. Many of these things are excellent. Some are not. This article will therefore serve not just as an educational tool, but also as a consumer warning about some traps to avoid.

Let’s start with the basics to try to make sense of this.

Wealthy families always have a team of experts to help them manage their wealth. Who exactly is on the team will depend a lot on the nature of the family and the kind of assets they own. The team is almost always going to include a lawyer and an accountant or tax adviser. Other members of the team can include investment management specialists, portfolio managers, real estate managers, estate and farm managers, trust and foundation specialists, family succession experts, and others including business advisers, art specialists and so on.

The starting point is that these activities are outsourced to third parties, and someone in the family (usually the founder of the family business) is responsible for managing this panel of experts and calling them in, as required, to solve problems.

But after a while, as family wealth grows, this fragmented outsourcing approach can stop making sense because:

  • There is just too much going on – “wrangling” all these advisers is taking up too much time
  • A more centralised and coordinated approach is needed. The advisers tend to be task-driven and sometimes a ‘bigger picture’ and more focused approach is needed
  • The advisers don’t work together as a proper team
  • The founder doesn’t have time to ‘waste’ on managing the family wealth. Instead, he or she wants to concentrate on the business (or the golf course).
  • Some of the advisers are occupied largely with the family’s work – to the exclusion of other clients. When this happens, what is the sense of paying their firm when you could simply employ them directly yourself?
  • If the founder is no longer around, there can be nobody else to perform this coordinating role

When these things start to happen, a family office makes sense.

In this context, a family office means bringing some or even all of these external advisers in-house, under the control and supervision of a manager or coordinator of some sort. At a certain point, doing it this way not only improves efficiency but can also actually reduce cost. Another plus is the elimination of conflict of interest. Family office professionals do not work for other families or for external firms. Instead, they are focused exclusively on your family’s wealth and your family’s success.

For the aristocracy, the family office concept is not new. For centuries, noble families have had Estate Managers and Estate Offices – primarily to look after family land holdings. It is a very natural step for these to evolve from Estate Offices to Family Offices, still looking after the family land, but now also their wealth. The Duchy of Lancaster is a great example of this. Established in 1351, it does not describe itself as a family office – but that is exactly what it is.

So what does it look like?

The smallest family offices consist of a single person managing wealth on behalf of a single family under the legal umbrella of a company, or sometimes a trust or foundation. In this case, the single person (let’s call her the CEO) is still managing most of the team of outsourced experts we talked about above, but she is probably performing some of the most important functions herself. She is also keeping everyone focused on the family goals and strategy and making the founder’s life much simpler by taking most of the hassle off his hands. This model is sometimes a beginning point from which things will develop in the future as family wealth grows.

A more typical size for a small family office would be around five people, and then it goes upwards from there. In some of the largest family offices, you will see a team of 50 employees or more. As well as these professional staff, you will also find support staff – drivers, security specialists (bodyguards), personal assistants, and yacht crew. In this model, the family office is not just looking after the family wealth, it’s looking after everything.

So we see that there is no ‘one size fits all’ solution. Much depends on the nature and internal expertise of your family, and much also depends on the nature of your family’s wealth. For example, a passive investment portfolio requires less intensive focus than an active portfolio of start-ups, venture capital, or real estate development. These things dictate not only the size of the family office, but also who exactly the professional staff will be. But above all, each of those people is focused on the family strategy and goals.

Family office structures also allow you to focus capital on the industries from which you made your wealth. If you can truly understand something, you are far more likely to succeed.  Finally, family office structures allow you to fully embrace the environmental, social, and philanthropic themes that are important to your family.

So every family office is different – but there is one important feature they (should) all share. Family offices are not profit centres. Yes, they are all about managing, protecting, and growing family wealth, but they themselves are not ‘for-profit’ business ventures. Instead, they are cost centres. Running a family office costs money. For some families that’s a worthwhile cost. For others, not.

Should I have one?

If you think a family office might make sense for your family the first question is whether the cost, as we discuss above, is justified by the potential benefits.

As a rule of thumb, many people recommend that the ‘trigger point’ for establishing a family office is a family wealth of around EUR 100 million. At that point, the cost of a smaller family office (cca. EUR 1 million per annum) starts to make sense, given the relative savings in professional and other fees.

My feeling is that in the CEE region because our costs are lower, the target number is closer to EUR 40 million.

Of course, once family wealth grows to bigger numbers, then justification of the cost vs benefit equation is less and less challenging. Jeff Bezos’ family office, Bezos Expeditions, is the largest in the US. It manages assets of USD 100 billion, so a few extra million spent here or there on the 159 employees is relatively trivial.

Too much commitment?

There is another model that is relatively popular; the Multi-family Office (MFO).
As the name suggests, a MFO is a family office that looks after two or more families rather than one, and is often presented as a ‘stepping stone’ towards a standalone single-family office. In its purest sense, it is a true ‘cooperative’ between the families involved and follows the same ‘cost centre’ financial model as a single-family office.

A MFO can sometimes make sense, especially if the families involved are close to each other and/or very similar in terms of their objectives and goals. Doing it this way has some advantages. It lowers the cost threshold, and to some extent allows sharing of expertise and skills. It can also allow families to access bigger teams with a wider range of skills and experience. By pooling financial resources MFOs can also sometimes open doors that might otherwise be closed to individual families.

On the other hand, a MFO system also dilutes some of the family office benefits we outlined above – especially the purity of focus specifically on your family goals. The more families there are in the MFO, the more the benefits dilute. MFOs with two or three families can work really well. Anything above five is quite challenging.

So yes, a well-thought-out MFO structure can work really well for some families. But beware . .

Not every “family office” is a family office

Over the last decade, many wealth management companies and financial advisers have seized on the buzz surrounding the family office concept and rebranded themselves (or a part of their business) as “XYZ Multi Family Office”. In doing this they hope to emphasise their claims to provide a comprehensive set of professional solutions in-house or at least in a coordinated way.

Despite this branding, these companies are not true family offices in the sense described above. They are not run by the families, for the benefit of the families. Instead, they are business entities owned by others. That’s not necessarily a problem, but it is a reason to be cautious and aware:

  • A true family office prioritises your family’s goals and strategies. A wealth manager has multiple clients and shareholders. Your goals are no doubt important, but you are not the priority
  • A true family office is a cost centre. It does not seek to make a profit in its own right. A wealth manager on the other hand is focused on making money for its own shareholders. Of course, there can be benefits from depth and economies of scale, but in the end, a wealth manager’s services will cost more because there are more mouths to feed.
  • Wealth managers have sales and marketing departments and invest energy in attracting more clients. True family offices do not do this
  • As with any wealth manager or financial adviser, due diligence is needed before investing. There are very many recently rebranded “Multi Family Offices” which lack the skills (and in some cases even the families) to do justice to the term.

Having said that, there are also some excellent commercial multi-family offices out there offering professional and capable service. In the Czech context, good examples include J&T Family Office and Emun. Wherever you go, caveat emptor – do your homework before you commit.

How do I set up my own family office?

If you think setting up your own family office might make sense, the first step is to define your and your family’s goals – both in the short term and also over the longer term. A family office structure can often be a part of a wider family succession strategy – creating a structure to manage family wealth for not just this, but also for future generations.

Before you decide on the type and scope of your new family office, it is obviously important to prepare a budget. You can then consider if the concept makes sense financially for your family and if necessary, how to tailor it so that it does.

Once you have set your goals, creating a family office is similar to establishing any other business entity. I am also happy to help you with this. Please feel free to contact me if you would like any guidance or assistance in this area.

 

Launch of Trust Training Service

As part of my consulting business, I seem to end up doing a lot of tailor-made training – not just in the area of trusts and foundations, but also in business and family succession strategies and planning.

I am happy about that as I really enjoy training.

Because there seems to be the demand, I have added a dedicated section on my website and look forward to even more training projects in the future.

For more information see my new dedicated Training page.