In the world of great family fortunes, the journey often begins with an entrepreneurial endeavor—a business initiated by a visionary founder that gradually gains success and value over time. The circumstances surrounding these ventures may differ, with some taking decades to flourish while others achieving rapid growth within a few years. In certain cases, the business remains under the control of the founding family, while in others, non-family ownership is introduced. Regardless of the specific scenario, most successful businesses, the owning family, and the primary decision-maker all go through a carefully planned transition. This transition is marked by a shift in focus from solely managing the family business to directing attention towards a larger entity known as the family wealth enterprise. A family wealth enterprise significantly differs from a family business, as it encompasses a broader scope. While a family business is often a precursor to a family wealth enterprise, the latter may or may not include a family business as one of its subsidiaries. The role of the family business within the context of the family wealth enterprise can vary, and the family’s involvement may take different forms, such as owner, manager, passive beneficiary, or board member. The crucial point to note is that, in addition to the family business, the family eventually assumes responsibility for a more extensive family wealth enterprise. This enterprise typically consists of a holding company with diverse subsidiaries, including various investments, both public and private, as well as complex ownership and governance structures. Our experience has shown that families who acknowledge their ownership and responsibilities regarding the family wealth enterprise tend to feel more successful, engaged, confident, and in control of their affairs. Importantly, they also have a higher likelihood of sustaining their family’s wealth over the long term.
The majority of family fortunes originate from a core family asset—the family business. The family’s identity is often intertwined with the business, and their financial capital is primarily directed towards investing in and supporting the growth of the family business. The CEO of the business plays a central role in decision-making, and most non-family decisions revolve around the business, its expansion, and future direction.
As time progresses and the family business flourishes, the family accumulates surplus capital that is not required for reinvesting in the business. Consequently, a pool of family assets begins to form outside the family business. During this phase, decision-making expands to include not only the family business but also the growing pool of family assets. Typically, liquid investments and personal real estate dominate the family’s wealth portfolio. As a result, the sources and uses of capital become more complex. The business primarily serves as a source of capital, while the family assets act as both a source (investments) and a use (personal real estate and early-stage private investments). In addition to managing the business, the family now needs to strategize and oversee the growing pool of family assets. It becomes crucial for the family to develop an investment strategy and asset allocation, identify suitable managers for the different investments, and establish reporting and information systems to effectively track and manage the family’s investment pool outside of the business. Often, the family leverages the expertise of employees from the family business, such as the CFO and general counsel, to assist in overseeing and managing the family’s liquidity.
While not all business-owning families progress to the third phase, many do—the transition into a full-fledged family wealth enterprise. In this phase, the family business is no longer the sole driver of family wealth but instead becomes one important subsidiary among many others under the umbrella of the family wealth enterprise or holding company. Decision-making expands further to encompass a complex wealth enterprise with multiple subsidiaries. Cash flows between entities become intricate, and family capital moves across the entire enterprise.
The transition from a family business to a family wealth enterprise is a significant milestone in the journey of great family fortunes. It marks a shift in focus from solely managing the business to overseeing a more comprehensive entity that includes various subsidiaries and complex ownership structures. Understanding the role transition and recognizing the responsibilities associated with owning a family wealth enterprise is crucial for long-term success.
By acknowledging the broader scope of their ownership, families can feel more empowered, engaged, and in control of their affairs. They are better equipped to make strategic decisions regarding their wealth portfolio, including investments, asset allocation, and capital requirements. Additionally, establishing effective reporting and management systems for the family’s investment pool outside of the business becomes essential.
Transitioning into a family wealth enterprise brings both opportunities and challenges. The family business, although still important, becomes just one component of a larger wealth ecosystem. Decision-making expands to encompass multiple subsidiaries, and capital flows become more complex. However, with careful planning, a clear understanding of roles and responsibilities, and a proactive approach to wealth management, families can increase their chances of sustaining their wealth over the long term.
In conclusion, the journey from a family business to a family wealth enterprise signifies a transition from a narrow focus on the business to a more comprehensive approach to managing the family’s assets. By embracing this role transition, families can navigate the complexities of wealth management, achieve greater success, and secure their financial legacy for future generations.