Adam Hatcher: Welcome to the 21 Clear Podcast where we talk about.
Anything to help you chaos, proof your family business.
I'm your host, Adam Hatcher, drawing from a lifetime of experience
with my own family company and 13 years scaling as an executive.
And today I am joined by the director of the Family Enterprise Center
at Kennesaw State University, Dr.
Sarah Davis.
Sarah, how are things in Atlanta, Georgia?
Sara Davis: Things are great.
Thank you for having me today, Adam.
Adam Hatcher: Sarah, uh, it is a privilege and we're gonna cover today.
You and I had a couple of phone calls and we were looking for
trends in family companies, and this idea of a family office came up.
What are changes you're seeing in families deciding to start a family office?
So that's what we're gonna talk about today.
But before we do that, Sarah, you could have been the director of.
Any academic program you could have written your PhD on anything
and you chose family businesses.
Can you explain what got you interested in people like us?
Sara Davis: Yes.
So this would've started, uh, when I was very involved in my local community.
I'm originally from Huntington, West Virginia, and I was working in sales.
And one way that you get new clients in, in, in sales is that you have to.
Have a strong network and I chose to get very involved in our
downtown community and I loved it.
We got to work with some excellent business owners, but they were a little
strange compared to what I learned in my MBA program and they were doing
things that seemed counterintuitive to that all important lesson
that we learned in MBA, which is.
Maximize shareholder value and that wasn't what was happening.
And so I sat with that for a while because it was intriguing and I
quickly realized that you cannot judge a business and their strategy until
you understand what their goals are.
And so like so many family businesses.
Their goals were not simply to maximize shareholder value,
but it was to develop a legacy.
It was to give back to the community, have an opportunity for their, their
children to come and work in the business.
And I thought.
This is a beautiful thing and you know, we're all humans and we all have free will
and we can do what we want and we can do what we want with our business, but we
don't learn about that in the MBA program.
And I chose to study family businesses and work with family businesses
because I think that we need to shine light on, there are other options.
Adam Hatcher: And when you say other options, explain a
little bit about what you mean.
Sara Davis: Yeah, so if you are constantly working towards maximizing
your shareholder value, you're typically looking at things in 90 day increments.
You're trying to Q1 beats Q4 of last year and Q1 of the year prior, and
you have this short term horizon.
But when you are thinking about other things, you're.
You're often gonna develop this long-term time horizon.
So it's not just, I want to maximize what I'm doing in the next 90 days, but I want
to build something that is sustainable for the next 2, 3, 4 generations.
And so when we see this shift, you start seeing businesses like Patagonia
where they chose to, instead of sell the business they have now given
it back to the earth, if you will.
Um, and so there's beauty in this.
But there's a distinct strategy.
So if your strategy is not to maximize the next 90 days, you need to be
thinking long-term and differently.
Adam Hatcher: It may not look like a publicly traded company strategy,
for example, giving back to the Earth in the Patagonia example.
But there is an intentional family decision that's made
behind it in driving it.
And one of the organizations or maybe institutions that families
can create that can make those decisions is a family office.
And I'm gonna.
Be candid with you when you first said that.
When I think of family offices, I think of massive family wealth.
I think of families with a hundred million dollars in assets or more, uh,
not in company valuation, but in assets.
I think of even Rockefellers and Vanderbilts.
But I'm curious, Sarah, well first will you explain what a family
office is and then we'll talk about some trends you're seeing in it.
So a family office is.
Sara Davis: So a family office is a way to manage assets, to
manage wealth, if you will.
It's a way to chaos proof the, uh, financial aspects of a family.
And so I think understanding where this comes from.
Will help us understand the changes and the trends and why they are important.
So you gave the examples of the Vanderbilts and the Rockefellers, and
I think that's a great place to start these ultra high net worth families.
They have a lot of money.
What do they do with it?
And if you just hire out a bunch of different people to handle the
different aspects of what you need as a family, it starts to get expensive.
And you don't become rich by spending money frivolously like you.
You need to be smart about it.
So what do you do?
You hire a couple of people and you develop what's called a single
family office, and you have.
A crew that comes in and they know how to do these things.
And so with, uh, the Rockefellers, you'll often see this idea of not
just managing the wealth, but also helping the family in other things.
Um, so that could be making financial decisions.
It could be something as simple as helping purchase a car so you don't
have to, 'cause that takes time.
Adam Hatcher: So it in the broadest sense, it can range all the way into not just
financial management or tax planning.
It can range into concierge services as well.
It depends on, it depends on the family.
Who do you see setting I.
Before we even talk about who we see setting them up, can you differentiate
for us a family office between having a trusted CFO inside your family company?
What's the difference between those two?
Sara Davis: So the CFO plays an incredibly important role in the business.
They make sure that the business is, is doing what needs to happen.
Hopefully the family's wealth is not solely tied up in one business.
And so who is managing all of that?
And that's where the family office comes in.
So you may be managing one business, you may be managing multiple
businesses, multiple investments.
It could.
Um.
Also have a philanthropic arm.
So who gets to benefit from this wealth?
There's a lot that goes into these decisions, and that's why we see these
ultra high net worth individuals that have these single family offices.
But I wanna introduce you to this idea of multi-family offices.
And so this is something we're seeing more in the last couple of
decades, this idea that it's not just.
Ultra high net worth individuals that need these services, but it could also
be those that have maybe a hundred million dollars in liquid assets.
So maybe we're not looking at 500, but just 100.
And what we see with multifamily offices is a similar service, but instead
of only working for one family, they get to work for multiple families.
Economies of scale shows us that if you can batch, um, these together and work
for say, maybe four or five families.
The price point's gonna be lower, making it more accessible, and
the services are still going to be that top notch level of service.
Adam Hatcher: Because you're blending the support together, and I'm curious as.
Mm.
As multi-family offices have risen.
Um, what trends are you noticing in how families are setting up structuring
and supporting family offices?
And I guess, uh, has someone asked me recently is the starting
point for these conversations sooner now than it used to be?
Sara Davis: I feel like it's so much sooner.
Even in the past couple of years, I feel like I'm seeing this
conversation happen way sooner.
We're not talking a hundred million dollars in assets.
We're talking $5 million, and they're starting to have these
conversations, and I think that's such an interesting trend because.
It has two parts.
On one hand, the services have become more available and when you're aware of
something, you can have a desire for it.
If you know that there is something out there that will make your life
easier, all of a sudden now that is something you're working towards.
But on the, on the flip side, we're not just looking at family
offices as something I need, but rather something I want.
It has become the symbol for generational wealth, and who doesn't want to leave
generational wealth for their grandkids?
There are some people, but the majority are in business, and
they don't want to squander that money in the next couple of years.
They want it to last beyond them.
It's that legacy aspect.
Adam Hatcher: And it sounds good to say we would like to set up something
more formal, either that we run or we have some independent advisors, or we
share advisors 'cause we're putting out a sign of a generational commitment.
But starting these is not that easy.
Uh, so I'm curious if someone's listening to this or if even they've come across
recently, the idea of a family office.
Let's, let's talk about some questions they should ask.
As they tiptoe into it.
I believe one of the mistakes you can make in a family company, in a family
business is drifting Sarah into anything.
If you drift into working there, if you drift through your time there versus
developing and looking for what's next, if you drift through managing the
business, it sounds like just kind of moving into a family office, 'cause other
people have 'em, would be a mistake.
So I'm curious when people are beginning and.
Families with, let's just say 5 million, 10 million in assets,
are talking about a family office.
What are the goals that they're hoping to accomplish in setting this up?
Sara Davis: So I love the idea of sitting down and thinking through
this, uh, the way you said it, don't drift into anything that's powerful.
It's very easy to think, oh, I've seen other people that want it.
Maybe I want it too.
But it's kind of like starting a business.
It's really easy until you do it like.
If anyone can talk about starting a business, but the amount of work that
goes into it is difficult, and it's the same thing with the family office.
Yeah, I would love to have generational wealth, but we really need to sit down
and think about what that looks like.
So your first point, what are your goals?
Likely generational wealth, but there should be some other things going on.
Um, is it tax planning?
Is it to develop a structure for your philanthropy?
Is it a way to, um, hold assets that best aligns with your personal belief?
There can be a lot of goals and kind of like the family
businesses that I, I worked with back when I was in Huntington, I.
I know that you have different goals, and I think that's a beautiful thing.
As long as you know what your goals are, you can develop a strategy.
And so knowing what you want for the family office before you sit down and
talk with um advisors will provide you with a much stronger conversation.
Couple other questions that you should think about before you sat
down with advisors who benefits.
Who is the benefit of a family office?
Do you have to be one of the children of the founder?
Where do cousins come in?
If we keep it just to children?
What happens when there's adopted children?
What happens when there's a second marriage and, uh, there are children
that come in with the, the new marriage.
These are a lot of difficult questions that are much easier to think about
when they're imaginary people.
So if you don't have anyone in your family that's adopted, you
can think about it right now.
If you're adopted in, do you, do you get to benefit yes or no?
That's a, that's a you choice.
But if there is a child that is being adopted in, that's not the time to have
that conversation because it becomes very personal and it becomes emotional.
So having these discussions beforehand is important.
So not only who benefits.
But how do they benefit?
So benefits can come in a lot of different ways.
There's, there's cash distribution.
Is it something that you get annually?
Is it something that you get based on life events?
So when you graduate from college, is there, um, a distribution?
Is there a distribution when you start college to help pay for that?
What about when you buy a house or when you start a business, um,
do you have to request it or is it something that's automatic?
That's a lot of nuance and that's a lot of future planning, but it will help
to not only refine the conversations that we're having with professionals,
but prevent chaos after you're gone.
Adam Hatcher: I imagine that families also pretty early and hopefully before they set
up a family office, have to talk about.
Is it an opt-in or an opt-out family office?
Is everybody in, as you were saying?
Is everybody in because they're related or because they're in a bloodline?
Or can you get in?
Is anyone allowed to get out?
'cause that can have consequences, not just for the person who
exits, but for everyone in it.
Just that basic, fundamental question of how people come in and out or if
they can go out needs to happen upfront.
Sara Davis: It is one of those things that it becomes too
emotional when it's in the moment.
Adam Hatcher: I think that's true for roughly anything in family office or in
running a, in running a family company.
Uh, these early conversations.
Sarah, what are some of the pitfalls you have seen families
fall into when they have.
Done the work of trying to talk about it ahead of time, but something they left
something out or something bad happened.
Sara Davis: I think an easy one is a resistance to share.
If you are one of those people who only want to keep your financials
close to your chest, this is going to be a very difficult process for you.
Are you having open conversations about financials, both good
and bad with the family now?
Are you willing to, to have those conversations or continue having
those conversations in the future?
Adam Hatcher: Sarah, transparency is something that runs through.
Family companies such as how they do compensation systems or how
they develop each other, or any family perks for working in the
company addition to compensation.
It goes even deeper if you decide to start a family office because there's
an intermingled financial component.
Sara Davis: Yes.
So that's an interesting aspect because if it's, if it's the business
and you're compensating employees, there's an exchange there and you
know that the labor is worth a certain dollar amount, and so it makes sense.
But when we're looking at a family office, those are dollars that in.
Instead of being distributed to family members could be reinvested and that
wealth distributed amongst the whole.
And so understanding who gets what and when is incredibly important
because there's not that same exchange.
Adam Hatcher: If someone.
Understands the risk that they're gonna have to be more transparent
if they've asked some of these questions ahead of starting a family
office and they understand generally the concept and how it differ,
differentiates from the company.
Let's talk for a few minutes about what you actually do when you start one.
So say a family is ready, what does it take to build a sustainable family office?
Sara Davis: I think first and foremost, you have to look at governance.
What kind of structure exists?
Um, do you have a family constitution?
I know a lot of people will look at that before they start a family office,
and I think that's the right time.
What are the rules that the family follows and how does that then apply to
the family office once it's developed?
Are there protocols in place if there's a conflict?
Again, we don't wanna wait until we're in the moment and emotions
are high and people are, are trying to prove their point.
But rather we have a structure in place that when you disagree, here's
how you, how you go about that.
Um, I'd say the next thing is, is really being clear.
This need for clarity.
Um, who is making these decisions?
Is there a board of family members that oversees the family office?
That's a very common structure.
And if so, who serves on the board for how long?
And who gets a say at these meetings when we're talking about family office
decisions, if you just turned 18.
Do you have as much say as someone who has worked in the business for 18
years and then somewhere in the middle?
What if you've never worked in the business and you are a family
member benefiting from the office?
Do you still have say,
Adam Hatcher: And it doesn't matter if you've worked.
In the family company, been in the family office, or if you do both at
the same time, you touch something that it will always be true.
There will be tension because you're mixing the unconditional nature
of family with the conditional nature of money and business.
So in managing disagreements that are inevitably gonna come up over time.
There.
These typically come up around inflection points.
There's a major change or an event that happens either in the company, in
the family office, or in the family.
What are a few of those?
That in setting up a family office, if someone's chosen to do it, that
they can just go ahead and plan for?
These are probably gonna happen and you should plan for them as you start.
Sara Davis: Birth, marriage, divorce, death.
That simple.
When someone is born, what happens when they get married?
What happens with the in-laws when there's a divorce?
Are the in-laws kicked out?
And if there's death, then what?
So not to boil it down to really simple, but those are the major
points that you need to think about and there will be more.
What happens if one branch of the family decides to stop talking
to another branch of the family?
What happens if someone wants to take money out of the family
office to support their startup?
Does a percentage of that go back to the family office?
Has everyone afforded that opportunity?
Lots of little things that can come up, but the big ones.
Birth, marriage, divorce, death.
Adam Hatcher: understand how the family office differentiates from the company.
Then set goals as a family, having a conversation.
What is the whole purpose of this?
It's more so than just investing money in portfolio management, tough
conversations to put governance around it, particularly around major life
events that will inevitably happen.
And they will put stress on the family office and then decide the services
that the office is gonna provide.
Is it simply investment management with, is there concierge service, philanthropy?
What?
What specifically does it do to accomplish the goal that the family has set?
It sounds easy.
You and I both know how charged and emotional it can be.
But for anyone who's thinking about this, I, I've talked to people who are
curious about the family office and this kind of conversation with a relative of
theirs would probably make them nervous.
But Sarah, if family members before they go into a family office are not gonna
have these conversations, what can happen?
Sara Davis: Oh, so much bad.
Open communication is probably the solution to 90%
of family business problems.
Have those conversations.
Otherwise, we have an imbalance of knowledge that creates animosity.
You start assuming what other people are doing.
That's never a good sign.
Open communication and the more structured open communication, the better
force people into open communication.
Have reoccurring family meetings where you're discussing what does this
family support, what do they agree with, what are they investing in?
Where do we want our money to go?
How do we want our money to be used amongst ourselves and have
those difficult conversations?
Adam Hatcher: And how can you help a family see that they are
not ready for a family office?
What are some of the red flag?
Someone just went to a conference with wealth managers and they heard this
talked about, and they come back and they wanna talk with the family about it.
What are some red flags that says Maybe not now.
Sara Davis: Assuming you have the assets and you're ready to invest in that.
Are you ready to share that financial information with everyone Who's
going to be benefiting from it?
If you're not already having those conversations, you need to practice having
them before you set up a family office.
The next is what does your governance look like?
Do you have the structures in place that is going to allow the family to
succeed in developing a family office?
Are you having that open communication and are you having it regularly?
And then the last one is.
Do you have the time and energy to do it?
Are you committed to doing it?
Because it's easy on paper.
It's really hard when you start, and so just doing it for a year
or two is not going to create that generational wealth that so many
family business leaders desire.
Adam Hatcher: And the amount of the wealth.
If families don't put that work in Sarah and lean into some of those uncomfortable
conversations, it doesn't matter how much wealth is there, it can all evaporate.
You told me a story about one or one of the wealthiest families
in American history, and this was part of their downfall.
Sara Davis: Yeah, that's the Vanderbilts.
They were there in the beginning, created just an immense amount of wealth, a
true, ultra high net worth family.
I think we've probably all toured one of their houses at some point and, and.
It's gone because it wasn't invested properly.
They didn't have the right discussions and the right, um, parameters in
place and that could happen to anyone.
That's why we have the adage shirt sleeve to shirt sleeves in three generations.
The idea that the first generation, they start the business, they, the
second generation grows the business and then the third generation
kind of destroys the business.
And I'd love to say that's not the case, but I.
You know when you only have 30% of family businesses making it to gen two
and about 12% to making it to gen three.
Maybe that adage, which there is a saying like that in almost every language,
maybe it's come about for a reason.
It's not to say that all gen threes are bad and sometimes
closing the business is a way to then have further, further wealth.
Say for example, you sell the business and then you convert those funds
into a family office, that is a, a viable option for generational wealth.
That's not tied to a business, but
but you gotta be prepared for that.
Adam Hatcher: What that does.
Opting for the comp for the family office instead of the company is it
takes one place off the table where people have to learn as a family how to
work together in a for-profit setting.
What's interesting to me with a family office, if someone choose, chooses to set
it up and go through some of the formal recommendations that you've given, is
that you've got to learn, particularly where there's a company involved as
well, anyone in the company has to learn.
How do we work on the family business inside the company?
And then a family office actually is its own, has its own family business in it.
It's an investment portfolio management device with some other
services that's got a family business mixed in the middle of it.
You're running two family businesses with two organizations
and it takes a lot of effort.
And I think you've done a good job here, Sarah, of talking through some red flags,
some ways to have serious conversations.
If someone is curious about this.
And wants to explore more.
I'm sure this is something that the, uh, that the Family Enterprise
Center at Kennesaw State deals with.
What, where are some places people can go to ask some more questions?
Sara Davis: So a simple place would be to go to our website,
family enterprise center.com,
and we have some resources on there, people who you can talk
to or you can reach out to me directly through that website and
we can continue this conversation.
Adam Hatcher: We will put Sarah's LinkedIn profile and we will put the
Family Enterprise Center's website in the show notes, so you can just
go there and click and see it.
One thing about 'em, Sarah, if I can talk to you about the,
the center for just a minute.
You all are constantly putting on events and whether someone
lives within an easy drive.
Of Kennesaw State or not.
Some of them are online as well as someone who's in Augusta.
Uh, so can you talk about a couple things that are coming up in the next few months
that could be interesting to people who are curious about family offices or
just about family businesses in general?
Sara Davis: Sure.
A couple of events come to mind immediately.
Um, here in June, we're doing an office hours.
It's a one hour open discussion that you can come in and talk to
us about anything, and we're gonna have a guest that is specifically
talking about wealth management.
Um, and for some reason in our office hours.
It never fails.
Family offices always come up, so that's a great option.
We do that monthly.
So if this month doesn't work for you, come back in July.
We also have a, um, virtual option in July where we're going to be talking about the
intellectual property behind your legacy.
So you want to create that family office and you want something that's
going to last over generations.
Let's talk about legal legally protecting your brand names and your trademarks.
Adam Hatcher: And if I'm not mistaken, in August.
You have maybe the most electric family business speaker
currently on this podcast.
Sara Davis: Do you wanna pitch right into that one?
So then in August, if you are interested in possibly hearing from two people
that are are you are already listening to, we will be talking about chaos
proofing your family business.
So while that's not necessarily family office related, it is
helpful if you are starting to grow that family business, which.
Hopefully will lead to a family office.
And with that one we're looking at the things you need to do before
you hire your first family member.
Adam Hatcher: I am excited.
Sarah and I have talked about this before and excited to talk with you about
it again, for those of us in a family company, something I've learned over.
A, a lifetime in and around ours, you need a lot of different people.
There are wealth managers, attorneys, coaches, advisors, peer groups that
are helpful and it is so important to have a few people in that group
when you choose to work with family.
Who are solely focused on the inner family business.
And Sarah, one thing I appreciate about, uh, Kennesaw State and about
your work is that you all laser in, particularly for small and mid-size
family businesses, what are the issues that wake us up that bother us?
What are those inner family business issues?
And then what are some of the ones around it?
Like how do you.
Make your HR department and your family work with each other.
You've touched some of those issues as well.
And so I hope everybody will go click down in the show notes, go see what Sarah's got
coming up and the center has coming up.
Uh, it's, it's good.
I've been a member.
Uh, and I encourage other people to join it as well.
Uh, Sarah Davis.
What a pleasure it is, uh, to talk about this interesting trend you're seeing of
family offices showing up earlier than we thought and helping people start to
get their head around what those are, what questions they should ask, and then
what are some ways they can avoid common pitfalls so they can have a great company,
great office, and a strong family.
I really appreciate you being here today.
Thank.
Sara Davis: Thank you for having me, Adam.
This was, this was great fun and I hope that I can help
you and others in the future.
Adam Hatcher: We hope you enjoyed, uh, this episode of the 21
Clear Podcast with Sarah Davis.
Uh, please subscribe to the podcast, follow us on LinkedIn as well.
Um.
We will be producing more episodes like this, uh, with Sarah, uh, with
me and with other people every time.
What we hope is we can just give you about 25 minutes where all you
have to do is think about that inner family business so you can take one
step further to a chaos proof family company, as my grandfather would've said.
Thank you so very, very much for listening.
We'll talk to you soon.