When you think of shared decisionmaking and succession in family enterprises, do you think of legacy assets? If not, you’re not alone. Usually family businesses, especially operating companies, hold the prominent place. Most financial advisors, lawyers and accountants focus on advising the client about his ownership stake in the family business. After all, the business is what generates the cash that provides the client with a high standard of living, gives the client the ability to buy other assets and enables the client to pay the advisor’s fees.
Yet a family enterprise client of any complexity often owns significant assets in addition to the operating company. Among these assets may be a legacy asset–an asset the family owns not because it generates a rate of return or provides employment for the family, but because it holds non-financial value in the family. A family owns a family business, such as an operating company or a family investment entity, for the for-profit purpose of making money; a family owns a legacy asset for its non-financial value. Non-financial value arises different circumstances. The value may be strong emotional bonds between siblings or cousins. Or the value may be shared memories arising from a place that’s been prominent in the family. Perhaps the place represents a location where financial success in the family began. The asset may represent a time in the past when the family made an important decision. Or the asset may be a place where the family simply retreats to enjoy shared leisure. Regardless of the type of non-financial value, the legacy asset is important because it creates this kind of value for members of the family, and not primarily because it makes money (though it may well generate a profit).
Think of legacy assets such as family vacation property, land, artwork, collections or funds of charitable monies. These assets occupy a place on the family’s sheet. They can be valued in dollars, and they may figure significantly in a financial plan with respect to asset allocation and diversification. But the primary reason the family owns the asset is for its value other than the asset’s capacity to generate cash.
Consider these examples:
- Family One runs a very profitable third-generation food manufacturing business. The business’ profitability makes it important to the family. But the asset that means the most to the family is an historic, eighth-generation homestead that requires expensive upkeep. The family pays for the upkeep with profits from the food business.
- Family Two runs a sixth-generation farm in addition to their holdings in insurance and retailing. The crops from the farm are marginally profitable, yet because of the family’s ties to the land, not one family member wants to sell the property (even though several of them are under pressure to sell).
- Family Three owns an operating company that’s declining in value. In the prior generation, many distributions from the operating company went into a family foundation, which makes cutting-edge grants to local charities. Intra-family tensions about decisionmaking in the operating company threaten to damage the foundation’s effectiveness.
In such cases, the family must consider decisionmaking, succession planning and transitions in the legacy asset alongside planning for the family business. The legacy asset’s governance must be considered in its own right, simply because of the asset’s non-financial value to the family. But even more, the legacy asset’s governance bears attention because the legacy asset’s decision-making structure and dynamics may influence the decisionmaking that goes on in the family business. For both these reasons, the legacy asset needs a governance structure of its own – one that fits the family, just as the governance structure for the family business fits the family.
To accomplish this, the family will need to consider its attitudes toward issues that arise with this kind of property. For example (and most of these pertain to non-charitable legacy assets):
- Shared purpose: Why does the family want to own or use this property together? What do they hope to get out of shared ownership or use of the property? How long do they intend to keep the property in the family? Under what circumstances would they sell the property, and why?
- Valuation and exit: Should the asset be valued so as to enable family members to exit easily, or does the family see itself as a long-term custodian of the property, such that exit needs to be discouraged?
- Care and maintenance: How does the family intend to balance responsibility for taking care of the property? Is there a governance reason for family members themselves to perform any of the upkeep, or will the family simply hire out all the work?
- Funding: Will the family pay for upkeep of the property using money from its for-profit activities, such as an operating company? If not, how will the family fund the upkeep?
- Outsiders nearby: If land is concerned, how will the family deal with succession issues that arise with owners of nearby properties?
These examples aren’t a complete list, and they can’t be. Ownership attitudes are unique to each family, and the legacy assets themselves are unique. That is why each legacy asset deserves its own governance structure - one that fits the family and the asset.