microphone

Channel WCN

The Latest in Law

Sep 26, 2023 | Trust and Estate Planning

Involving Family Members Who Are Outside the Business: Three Options

by

We have written about a changing dynamic in family businesses where the next generation is no longer inclined to work in the business. To read a recent article on this trend, click here.

There are many reasons for this. In some cases, the relevant aptitude and skills are lacking, and having the individual take on an operational role is simply not a good idea. In other cases, the family member has developed a passionate interest in an entirely different area and feels compelled to pursue a career in that field. And increasingly, adult children have their own entrepreneurial aspirations and are looking to start a business outside the family enterprise.

The good news: There are a variety of ways for family members to support the business through a non-operational capacity. We discuss three of them below.

1. Consider a Family Council

A family council is a great way to keep adult – and perhaps even teenage – family members involved in the business. Key initiatives of a Family Council typically address a broad range of topics, including:

  • Business mission and values
  • Business alignment and agreements
  • Philanthropy and venture capital
  • Governance
  • Communication and family event planning
  • Conflict resolution
  • Leadership development and relationship building
  • Continuing education

Family members who do not work in the business can actively participate in the Family Council by getting involved in Council initiatives that align with their educational background, business experience and specific aptitudes, skills and interests.

When younger generations participate in a family council, they receive high-level information about the mission, direction and activities of the business. Even when people do not take on an operational role in the company, regularly engaging with a council provides family members with important linkages to the family and its business.

2. Family Venture Capital

Family businesses can be a robust economic engine, and successful businesses are increasingly allocating capital to strategic investments in startups and emerging enterprises. Roughly one third of all corporate venture capital transactions in the US originate from family firms. Family VC typically yields a higher likelihood of successful exit, better market performance and more valuable innovation. The result: increased shareholder value and family wealth.

Family venture organizations can be highly effective investors in private companies. Unlike formal private equity and venture capital firms, family funds typically do not have a fixed fund life that limits the time they can hold an investment. And unlike most traditional funds, family venture funds are free to invest in a wide variety of industrial sectors and business stages. For these reasons, family venture investments represent an attractive way to deploy available capital and stimulate economic growth.

Frameworks for deploying family venture capital typically address several areas:

  • Criteria for evaluating venture requests
  • Setting expectations for investment performance
  • Approach to investing in non-profit ventures
  • Consequences if investment expectations are not met
  • Investment administration and level of family involvement
  • Management of the venture being financed

The structure and conduct of family venture capital is often determined by the complexity and financial scope of the business. A large family business with billions in shareholder value will often establish a Family Office and employ a team of professionals to evaluate targets and manage the investments and related administrative needs.

Most family businesses are smaller, with modest investment budgets. Families may elect a ‘do-it-yourself’ approach to operating the venture arm, in which teams of family members undertake the targeting, evaluation, investment and performance monitoring activities. In these scenarios, family members who are not working in the business can play a vital role in the venture fund by channeling their knowledge and their financial, administrative and other business skills in ways that address these areas. This allows family members to help promote the family’s success even while working outside the core operating business.

When executed well, venture investment can offer families a way to build wealth and leverage business opportunities, while providing an effective platform for helping younger generations apply their business acumen.

3. Assisting the Family Foundation

A family foundation that is focused on a few target areas can have considerable impact when business owners and their respective families are able to channel resources and support distinct needs. In addition, some charitable endeavors can be supported not just with money, but with family time and expertise.

Family members who are not working in the business can still add significant value to the foundation. Those involved in specific fields, for example education, biotechnology, product engineering and information systems, may have valuable perspectives on evaluating funding proposals related to those and related disciplines. The foundation should capitalize on these talents.

A focused family philanthropic fund serves to reinforce the family’s values, particularly as they relate to the importance of giving back. Within the family, the younger generations can reap exceptional benefits as they witness the family working together not just to advance the business, but also to help others. Family members who do not currently have an operational role in the business may be more likely to feel more comfortable about joining the business down the road.

The younger generation is often more sensitive to non-profit causes. When engaging these family members, identify their high-level causes and consider incorporating some or all of them in the foundation’s strategy.

The beauty of a family foundation is that it’s ideal for involving younger family members and teaching them the value of sharing. As they mature, they can gain financial literacy by observing portfolio management and budgeting. Perhaps most important, a family foundation educates younger generations about commitment and responsibility.

In WCN’s Private Client Services practice, we offer Family Office Services to our clients, including owners of closely held business. Please call us at 781-235-5500 or contact us to further discuss how to effectively involve family members who are not working in the family business.

This article is not legal advice and should not be taken as such or relied upon as legal advice.

Channel WCN Posts