Complex Family Enterprise: A new way to describe a growing phenomenon
By Patricia M. Angus – Originally published in Trusts & Estates, March 2023
Trusts and estates practitioners (for example, lawyers, accountants and investment advisors) take their clients as they find them. If you’re writing a will or doing an estate plan, you start by finding out as much as possible about the client’s assets and liabilities so that you have a full picture when developing the plan. If you’re an accountant, you advise and report on the totality of the client’s holdings, from ownership of a small business to shares of large companies. By contrast, family enterprise consultants and academic researchers have eschewed this comprehensive view and instead zero in on the “family business,” often without considering the family’s other holdings and joint endeavors. This narrow lens limits the view of the family and its activities beyond the subject business, which results in sub-par understanding and advice. Let’s consider a new framework to describe the reality of many families—the “complex family enterprise” (CFE)—and to assist practitioners and academics alike. This will also increase awareness of the proliferation of CFEs and highlight their enormous impact on the economy and society.
In academia, there are just a few peer-reviewed journals focused on the intersection between family and business, the most prestigious being the Family Business Review.1 In addition, academic research on families, family offices, family businesses and the like appears in journals as far ranging as the Journal of Finance and the Academy of Management Journal. In these journals, the primary area of focus traditionally has been the “family business.” Even though there’s a growing movement to shift the lens of analysis to the family rather than the business, to date there’s been little effort to adopt a broader view. Authors in these journals, as well as practitioners who write for this publication and others like it, would do well to consider whether and how the concept of a CFE might help to move the field forward.
What’s a CFE?
A CFE consists of one or more operating businesses, investments and philanthropy owned or controlled by a single family. They may be managed by a single family office (SFO), which is an operational unit with responsibility for coordinating activities ranging from investment and estate planning to philanthropy and more on behalf of a single (small or large) family. Alternatively, a family may manage the different aspects of the CFE in a more dispersed way. For example, the family may collectively co-own the operating business(es) directly or through trusts, while all investments are handled separately. Family members may have little interaction with each other as they retain autonomy over their respective holdings. Some family members may be involved in a family foundation, but at the same time each family member may engage in their own philanthropy separately.
The components of a CFE, including some key characteristics and challenges of each, are:
Family business. A family business is often the first venture of a family on the path to creating a CFE. A young entrepreneur or entrepreneurial couple creates a new business, for example in textiles. They rent space for production and management of the business. The family business has some unique opportunities. It has “patient capital”—owners are often willing to forego short-term profits for long- term growth. In most cases, sweat equity substitutes for compensation—family members, with or without formal roles in the business, contribute their time and skills gratis. The family’s culture and values shape the brand and relationships with employees and other stakeholders. Families judge their success not just by financial returns but also by the broader “socio-emotional wealth,”2 a growing area of academic study that essentially shows that families are concerned with their identity, social relationships, bonding opportunities and reputation. Unique challenges include succession (not just who/how to choose the next CEO, but who will own the business in the next generation), role clarification (when are you speaking as a mother versus a business owner) and meeting the goal of having the company beat not just the odds of your average start-up (most don’t last five years) but also survive for several generations.
Over time, a successful family business generates excess profits that the owners find can be used to buy the real estate housing their company. And, in many cases, there’s excess space that they decide to rent out to a third party. This creates a new revenue stream. The family is no longer just in the textile business, they’re also in real estate. For some families, this is an interesting way to diversify the business, and they may decide to start developing business lines around property management. Many take it to the next level and go into real estate development. All at the same time, they’re accumulating assets outside the original family business.
Investments. Families who have succeeded in an operating business and real estate often start to develop pools of investments. With the help of their lawyers and other advisors, they might create ownership structures such as limited liability companies (LLCs) and other holding vehicles to organize, minimize taxes and transfer holdings to the next generation. Before long, they realize they need outside expertise. Some families keep full responsibility for themselves (either appointing a family member to invest on the family’s behalf or leaving each family member to manage their own portfolios); others rely on outside advisors. In recent years, more family members have sought to align their values with these investments, via impact investing, environmental, social and governance focus or otherwise. However, the wisest come to realize that the skills that helped them succeed in business or real estate may not be helpful for investment management. They understand the difficulty and risk of taking it all on for themselves and seek outside help.
Philanthropy. While the above aspects of a CFE focus on capital accumulation (including impact investing), it’s quite common for a family—especially in the United States, United Kingdom and other countries with philanthropic cultures and sectors— to create some organizational structure around their charitable giving. Whether it’s a donor-advised fund, private foundation or merely a process of organized philanthropy, it’s an additional component of the family’s collective endeavors.
The family may develop a comprehensive SFO that provides organizational structure and management for the family’s business, investments and philanthropic ventures.
Of course, at this point, the family has gone way beyond simply being owners of a family business; they’ve reached a level of complexity that requires some organizational structure. What holds all this together?
SFO. Despite the fact that there’s no single definition of a “family office,” and it’s often used to describe private investment companies, in fact a family with the level of activity described above often finds itself creating an SFO. That is, a separate structure to manage a range of activities on behalf of the family. It might start as an “embedded” SFO that’s housed in the operating business (for example, the chief financial officer of the family business might take on the task of reporting to the family on financial returns and coordinating with outside accountants, lawyers and investment advisors) or a “virtual” SFO (a lead advisor coordinates the work of the family’s team of advisors). At some point, dedicated employees are hired, which may include professionals from investment, law or accounting backgrounds as a start. Over time, or at the beginning, the family may develop a comprehensive SFO that provides organizational structure and management for the family’s business, investments and philanthropic ventures.
How to understand, monitor, regulate and manage CFEs will be some of the most important questions of the coming decades.
This is certainly a full-fledged CFE. Family members own shares of an operating business as well as investment portfolios. They’re tied together through these financial aspects and may also co-fund and take active roles in managing or overseeing philanthropy. Regardless of what they’ve created, the family itself is what holds all this together. Family members are both at the center and periphery of it all at the same time. For example, they’re likely both owners and clients of the SFO. And many families, especially in the United States, have a series of trusts, LLCs and other holding companies that tie their ownership together, for generations or in perpetuity. It’s an intricate web that can be overwhelming for the family and complicated for advisors or academics who seek to focus on just one aspect such as the business or investments or philanthropy.
Why Does This Matter?
Certainly, envisioning this set of entities and activities as a CFE is helpful for the family itself. It acknowledges their reality. Because one moment a family member might be handling an investment decision, the next they’re contemplating the future of the operating business. A view of both is needed – look at the specific issue, but understand the overarching reality.
But more importantly, these CFEs are growing fast and deserve attention from academics, practitioners and policymakers. While in the past it might have taken three or more generations to become a CFE, today it could happen in a matter of years. Further, the size of some CFEs now dwarfs other businesses, investments and philanthropic endeavors. Some common examples include the Waltons in the United States, Tata in India and Samsung in Korea. In each case, while the operating businesses owned or controlled by each family are perhaps the most visible, the families actually have extensive investment and charitable endeavors as well. Their influence on public issues and public policy is enormous.
The impact on the economy goes far beyond the business (though it should be noted that the vast majority of businesses worldwide are owned by families). It seeps into the social contract. The decisions these families make with their philanthropy are often larger than government agencies. The growth of CFEs may be the elephant in the room of this new Gilded Age. And how to understand, monitor, regulate and manage them will be some of the most important questions of the coming decades. For where CFEs go, the rest of economy and society is likely to follow without serious consideration by those affected. For these reasons, it’s important to use the right frame of reference—seeing the whole CFE is a better lens than family business or family office or the family itself.