For families with significant operating businesses, the family office often begins as an “embedded” function — housed within the company itself and supported by its staff. For some families, that structure continues to work well even as the company grows.
Aaron Smith, senior family office manager at Vermeer, a global manufacturer of industrial and agricultural equipment based in Pella, Iowa, leads a team of three Vermeer employees who handle everything from family education to the administrative aspects of the family’s charitable foundation.
“Having an embedded family office structure has really allowed for an intimate relationship to be built between the Vermeer family and the operating company – seen through two main avenues,” Smith says. “First, the communication lines between the family shareholders and the operating company board of directors are very open, transparent and frequently utilized — leading to a very informed shareholder base. Secondly, the family office serves as the appropriate conduit to intentionally develop family members that have an interest in and a skillset for the business. With the close relationship between the family office and the company, walking the path of the family employment policy is a more refined endeavor for both the business and the family member.”
While an embedded family office works well for some families and companies, others find that over time, that structure is no longer sustainable.
Chris Dickson, Family Office Advisory leader for RSM US LLP, notes three common scenarios where an embedded family office may transition to a standalone single family office:
- Sale of the operating company. “The family office employees need a new home to live in to support the family, so that naturally requires a lift-out scenario,” Dickson says.
- Generational transition. When the current generation is actively involved in the business, their use of the family office typically aligns with their ownership and participation. In the rising generation, however, some family members may become passive owners who sometimes — but not always — look to the family office for greater support. This shift can create sensitivities — with active owners sometimes perceiving that their involvement in the business is underwriting services used more heavily by passive owners — and can introduce new family dynamics. “In those cases, it may make sense to begin to separate the embedded family office to help navigate the dynamics that may arise,” Dickson says.
- Overworked executives. If the CFO of the family business is also serving as CFO of the family office, that individual may be stretched too thin. “You can’t be 100% CFO of a business and 100% CFO of a family office,” Dickson says. “If the family office’s complexity or volume begins to require more concerted effort by embedded family office personnel — and it’s becoming a distraction or preventing them from focusing on the business itself — it may make sense to either formalize the embedded family office within the operating business, with staff who don’t wear dual hats, or lift it out entirely.”
The decision to move a family office out of the operating business doesn’t necessarily depend on the size of the business or the family. Instead, families must weigh a number of considerations in determining how best to structure their office for the future.
“I’ve seen embedded family offices serve a large number of family members of significant wealth and do it well. I’ve also seen embedded family offices serve a smaller group and encounter sensitivities, particularly when differences emerge between those active in the business and those outside of it,” Dickson says. “There’s no one clear-cut answer. You have to look at the at the facts and circumstances of the situation.”
When advising families on whether their family office should remain embedded or transition to a standalone model, RSM’s Family Office Advisory Team engages relevant stakeholders — family members themselves and key executives from the family business who support the family — in a discussion about the purpose of the family office, regardless of its operating model.
“What services is it providing today, and what services may it need to provide in the future for both current and rising generations?” Dickson asks. “With that in mind: If the office stays embedded, how should people, processes, technology and governance evolve to address the challenges of an embedded model while continuing to support the overall delivery of those services? If it is being lifted out, what type of structure does it make sense to lift into? What are the tax and governance implications of doing so? From there, you can then think through the people, processes and technology.”
Together, RSM and the families develop a blueprint outlining what the end state could look like in either scenario — embedded or standalone.
“What needs to happen to move from today to either of those futures? What are the quantitative and qualitative costs? What are the pros, cons and key considerations?” Dickson asks. “Then we ask: Based on all this, which direction makes the most sense for your family? From there, we collaboratively build the implementation roadmap.”