Deloitte Private

Risk and the family office: What’s top of the agenda?

2020-01-15T15:34:15+00:00

At Deloitte Private’s 2019 Family Office Symposium in London, we used voting technology during one of the main plenary sessions to poll the audience - consisting of more than 50 senior executives of single family offices - on the topic of risk management.

The results showed that risk is high on the agenda for many family office executives, and so this blog post marks the first in a series on “Risk and the family office” where we’ll explore some of the key risk issues keeping family offices awake at night, as highlighted by our quick survey.

Which risks are highest on the agenda?

During the Symposium, we asked the attendees an open question on what they considered to be their greatest risks. The outputs from that question are summarised in the word cloud below.

The larger the word in the word cloud, the more family office executives mentioned that risk of being high on their list of risk issues. And whilst a number of risks appear multiple times and are phrased slightly differently, (e.g. cyber, cyber crime, cyber risk) the themes are unmistakeable.

Cyber risk
Investment risk
Tax and political uncertainty
Next generation
Economic crime
Succession planning

So who really cares?

The results show that despite many family offices having a low to mid attitude to risk, executives didn’t consider risk management to be high on the family’s agenda. This may be because they have not yet experienced a significant event that has threatened their family and so do not see the value in implementing risk management tools. However, as the pace of life continues to increase and our world becomes more reliant on technology, risks are evolving and becoming more complex to identify and react to. It therefore follows that it is the responsibility of the family office executive to educate the family and protect them from risks that they may not consider as potential threats.

What can I do about it?

All but one executive said that they manage risk in-house; yet 69% of the executives in attendance stated that they do not have a risk register within their organisation. Whilst this is not surprising given the nature of most family offices (small teams, limited resources and competing priorities), this is a straightforward way to start managing risk more effectively - and something we always recommend implementing no matter the scale of your organisation.

A risk register is where management seeks to document and monitor all possible risks that threaten the family office and family members. The live document lists out all identified risks, their likelihood of occurrence, scale of their potential impact, action points and action owners.

The risk register will be bespoke to each family office and the specific risks that they face. Some questions that you could ask when beginning to construct your risk register are:

What are we most concerned about that will negatively impact the family office/family?
Which of these are most likely to occur?
Which would have the biggest negative impact on the family office?

Working as a team to answer these questions, incorporating staff from different areas of your family office (including legal, tax, compliance, finance, investment management), to identify a vast range of risks and potential threats - this brainstorming exercise is the first iteration of your risk register.

Once you have identified the threats, the next step is considering how each of those threats (risks) can be prevented (or mitigated), and to identify actions in the event that they can’t be. For example, a classic key risk for any family office is the death of a principal. Having a clearly documented plan for when this happens, in our experience greatly improves the outcome for both the remaining family members - as well as the family office.

Look out for our next blog post

Subscribe to the Deloitte Private blog for alerts on the next blog post in this series, which explores the risks highlighted in our poll further, and aims to help you build your own risk register, arming you with some practical tools for risk management within your family office.

Jessica Hodges, Director, Family Office Audit and Assurance Lead, Deloitte Private

Jessica specialises in audit and advisory services for privately owned asset managers, sovereign wealth funds and family offices. She leads audit and assurance for the Deloitte Private Family Office practice; providing a range of services to some of the UK’s largest family offices.

She delivers both external and internal audits to her clients, including reviews of their control environment and governance structures.

Charlotte Lord, Senior Manager, Audit & Assurance

Charlotte is a senior manager in our Investment Management and Private Equity practice with over 7 years of experience in external audit and advisory engagements, specialising in private wealth managers, private equity houses and family offices.

Jutta Tornivaara, Senior Manager, Audit & Assurance

Jutta is a Senior Manager in our Investment Management and Private Equity practice specialising in audit and assurance for family offices. She has experience working with private equity houses, sovereign wealth funds and family offices. In addition to external audits, Jutta has delivered a number of AAF, ISAE3402 and SOC1 control reports, and has experience in performing bespoke operating model, asset verification and other reviews.

The role of the private equity backed CFO

2019-11-20T12:27:32+00:00

By Andy Halls, Lead Partner, Private Equity Backed Business Programme, Deloitte Private

How will the role of a private equity (PE) backed CFO change over the next 10 years?

That’s the question we asked over 100 CFOs, PE investors, CEOs and Chairs when producing our report into The role of the private equity backed CFO. What we were most surprised by was the overwhelming commonality, consistency and clarity of the key message: significant changes are occurring in the role of the CFO and the pace of this disruption will only accelerate.

The most powerful theme to emerge from our interviews was the dominant and pervasive role that technology is expected to play in shaping the future of finance: data analytics, automation and predictive technology will bring about a revolution in the finance function over the coming years.

This will cause a fundamental shift in the shape, structure and expectations of a finance team and of the role of the CFO. However, our survey also reveals a key challenge – CFOs are unclear on the right path to take to utilise the opportunities presented by technology and feel that a shortage of skilled talent and appetite for investment in technology platforms risk hampering progress.

PE investors want CFOs to drive this technological change. From a traditional, backward-looking number-cruncher, they want the role of the PE backed CFO to switch to a forward-looking “Chief Value Extractor” with sufficient vision to foresee and navigate the changes ahead and make the greatest contribution to value from day one.

Now is the time for CFOs to act to bridge this gap. Expectations are high, but the rewards for those who embrace disruption and evolve will be commensurate: their role will be broader and more fulfilling than ever.

To read more about the key findings of The role of the private equity backed CFO and to download the report please visit: www.deloitte.co.uk/pebackedcfosurvey

Andy Halls, Lead Partner, PE Backed Business Programme, Deloitte Private

Andy leads our programme for private equity backed businesses in the UK. During his career Andy has had significant involvement on a number of Deloitte's most high profile clients both locally and overseas. He specialises in advising private businesses that are undergoing fast growth or periods of change; including, but not limited to, those that may be working towards an 'exit event'. Andy is an audit partner but has also worked on a number of transaction support and due diligence assignments for his clients and has led advisory teams on IPOs and bond listings. He has advised a number of businesses in the lead-up to and through an exit process.

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Valuation strategies for high-growth companies

2019-10-25T10:38:45+01:00

By Tom Rees, Head of Business Development, Deloitte Private

Today we live in a disruptive world. We are seeing early-stage or disruptive companies emerging in large numbers across multiple industries, and valuing these businesses is often not as straightforward as it has been in the past for traditional companies.

In former times one would expect ownership of a minority stake in a private company to be valued at a significant discount to its equity value (the ‘minority discount’). This is no longer necessarily true in a world where investors are all trying to get a little piece of the pie and put a bet behind an increasingly diverse range of opportunities. Rather perversely, owning a small stake in a company now has a relatively higher attractiveness to an investor simply because they have diversified their risk.

When considering valuations of high-growth businesses, it is important to first fully understand the difference between value and price. When we talk about value we are in effect asking ourselves what the asset or the opportunity is actually worth to the investor. Price, on the other hand, is a measure of what the market will actually pay for a particular asset. Firms should be aware that value and price are not always equal, and that there may be a ‘gap’ to deal with.

In traditional businesses, we would expect to see cash flows projecting upwards over time with some variation in possible outcomes. However, for start-up companies the profile of potential outcomes and cash flows is fundamentally different – that is, investors have to grapple with fundamentally different business propositions. Typically early-stage businesses see lots of downside (i.e. losses) early on as they invest large sums of capital to develop the business, but the upsides they expect to see further down the line are even greater than for their traditional counterparts. Investors are having to factor this uncertainty into their pricing, which has the result of producing a very wide range of valuations for these companies.

Also, firms should be aware that valuation approaches come and go over time as businesses evolve. For a company in the seed stage of growth, valuation may revolve around replacement cost as the company is still to prove out its business case. As the company grows and becomes profitable, milestone-driven outcomes, market-based methodologies and discounted cash flow methodologies all take precedence for valuation purposes. Firms should be cognisant of where they are in their company lifecycle and therefore which methods a potential investor is likely to use.

If these themes resonate, Deloitte hosts a quarterly CFO breakfast series for FinTechs and high growth companies. To learn more, or register for future events, please visit: www.Deloitte.co.uk/fintechcfo

Tom Rees, Head of Business Development, Deloitte Private

Tom is Head of Business Development for Deloitte Private, which advises privately-owned, private equity backed and venture capital backed companies across Deloitte’s breadth of services - audit, tax, financial advisory and consulting.

Tom has spent 11 years working in business services, five of those working with owners and CFOs of entrepreneurial businesses at both PwC and Deloitte. Tom holds a relationship focused position, understanding clients issues and connecting them to relevant individuals from within his extensive network

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Entering the banking space: Challenges for Fintech

2019-08-28T12:27:22+01:00

By Vishwas Khanna, Director, Deloitte

‘Disruptive’ is the most suitable label for the latest cohort of Challenger Banks and other Financial Technology firms in the banking sector which have sprung up over the last few years. This sub-sector of Fintech banks is decidedly new, exhibiting agility and placing innovation at the core of their business, but they are entering a space already laden with relatively stringent rules and regulation.

Deloitte Private recently hosted a breakfast seminar for FDs, Heads of Tax, CFOs, and similar from various Fintech firms in the banking sector to discuss some of the challenges they may face as they continue to consolidate and expand.

Regulatory Outlook

The session kicked off with a look at regulation, specifically analysing the themes of significance in 2019 and constants over the past few years.

The first theme is the shift from regulatory development to supervision. The flurry of rule-making that has occurred since the financial crash has mostly come to a close, and so now the regulatory bodies take on a greater role of policing these regulations they’ve spent the last decade crafting. As a result, the compliance burden for firms may be greater than ever and firms need to ensure that they meet requirements.

Another key theme comes with an increasing risk of exposure to cyber and other IT risks in an integrated world, especially in a sector with ‘tech’ in its name. Building resilience to operation disruptions and understanding their exposure to potential risks is key for firms moving forward, especially as they scale up their enterprises.

Further themes include adequate preparation for Brexit (especially in case of a ‘No Deal’ scenario), the transition away from LIBOR and the need for firms to reduce their exposure to it, pressures from regulators (and investors) on climate change and sustainability issues, and the prompt from regulators to ensure firms are applying clear and fair charging structures.

Regulatory constants covered the need to address root causes of prudential failure with internal governance, scrutiny of business models in a changing risk landscape, protection and use of data, the level of access ‘vulnerable’ consumer groups have to FS products & services with their increasing digitalisation, testing for cyber vulnerabilities, and awareness to model risk management.

Regulatory Authorisation Process

The process of authorisation by the FCA and PRA is an expensive and time-consuming one. Generally, the process runs through several stages of presenting rough plans and refining them through consultation with the regulators before making a formal application, which is then followed (if successful) by a period of authorisation with restrictions before full authorisation is granted.

Throughout this process, a key item for firms to consider is the approach from the regulator’s point of view. One example of this would be how firms generally approach their plans and proposals from a micro, self-centric point of view, whereas the regulator may take a macro approach to analyse how a plan fits into the entire system.

Tax & Compliance

UK banks face a somewhat unique set of compliance and data sharing obligations, shifting the focus of consumer governance onto the banks themselves with regulation such as ‘Disclosure of Tax Avoidance Schemes’ (DOTAS) and the 2020 Mandatory Disclosure Regime (2020 MDR). Internationally the OECD’s Common Reporting Standard and FATCA in the US serve similar functions. There is also the UK Banking surcharge, an extra 8% rate applied to profits of banking companies, calculated on the same basis as corporation tax. This should be applied only to companies offering banking services, so restructuring to separate out non-banking services can be something to consider.

Furthermore, when it comes to funding, there is no one-size-fits-all approach for UK banks. Debt and Equity funding will usually receive different tax treatments – for example, dividends are not usually tax deductible. By contrast, interest payments normally are. Therefore, it is key for financial institutions to keep an eye on their funding structures and the tax/regulatory consequences of them.

Expansion overseas adds a further layer of complexity for firms. As the UK is a member of the OECD, the actions of the Base Erosion and Profit Shifting initiative (BEPS) apply, covering a wide range of international anti-avoidance instruments. Part of BEPS are the global transfer pricing guidelines, that a significant number of foreign markets adhere to and bring with them requirements for documentation and evidence supporting the ‘arm’s length’ nature of intra-group transactions. Further items of interest are Corporate Interest Restrictions, and international Hybrid Mismatch Rules to catch potential tax advantages through the exploitation of ‘mismatching’ tax treatments between jurisdictions.

Overall, there is a vast minefield of regulatory challenges for Fintech firms, both at home and abroad. New and excited firms may get carried away with their expansion and goals, and so it is important not to be caught up and held back by potential exposure to regulatory risk.

Highlights from the seminar

Deloitte Private host a regular series of FinTech and High Growth events for CFOs, FDs, and Heads of Tax. Our next event, on October 10th will cover regulatory and tax challenges for companies in an intermediate growth stage. Learn more or register here.

Vishwas Khanna, Director, Deloitte

Vishwas is a Director within Deloitte’s Risk and Capital Management Practice and leads the Deloitte EMEA Supervisory Review and Evaluation Process (SREP) initiative and New Bank Authorisations in the UK.

Vishwas specialises in prudential regulation (CRR/CRD), stress testing and ICAAPs, risk management frameworks and risk governance and has 11 years’ experience working on projects in UK, EU, Ireland, India, Middle East and the US.

Vishwas is an MBA (Gold Medal), an FRM and Licentiate of the Institute of Company Secretaries of India (ICSI). He recently spoke at the BARA Seminar for Indonesian Banks in Prague, Deloitte SREP Roundtable in London, Deloitte SREP Seminar in Malta, organised the Deloitte SREP Seminar for SSM Banks in Frankfurt and spoke at several Infoline conferences on industry challenges in relation to SREP/ICAAPs.

Looking ahead to 2025: The CFO’s crystal ball

2019-08-16T11:45:00+01:00

By Simon Martin, Director, Deloitte

Forecasting the future is a dangerous game in any sphere of life, but in finance it’s perhaps doubly so. The world is changing so fast and across so many aspects of our work that what would have seemed futuristic just a few years ago is already becoming reality. The tech revolution is here and it’s changing everything. Does that thought excite or unsettle you? For most finance leaders, it’s usually bit of both so take some comfort, you’re not alone.

At the Deloitte Private CFO Conference for Private and PE-backed businesses, we took some time to consider what the future might hold for CFOs and finance leaders.

The first thing to say is that digital finance tools and technologies will reshape not only how finance functions operate but, more fundamentally, what they do. Let’s look at just a few of the areas of impact and make some predictions.

Digital finance

Over the course of the past few years, a whole new digital finance ecosystem has evolved, using disruptive technology, innovation and data to elevate and differentiate the capabilities of the finance function.

Operational finance
Automated Transaction processing – Robotic Process Automation (RPA) enables leaner operations, reducing costs and redirecting resources toward analytics tools that spot trends, anticipate risks and predict opportunities in high-value areas.

Business finance
Dynamic driver-based forecasting – cognitive computing and in-memory enables advanced planning and forecasting models to mine databases and perform real-time scenario analyses, uncovering predictive trends and generating key data insights.

Specialised finance
Automated controls and exception-based reporting – RPA enables automation of controls while cognitive computing tools produce exception-based reporting from blockchain databases to reduce risk.

Process and policy
End-to-end process performance – cloud platforms are leveraged ubiquitously across the enterprise providing consistency in processes.

Organisation and people
Expert teams – finance practitioners demonstrate enhanced capabilities in the digital space, leveraging specialised financial expertise and data-driven insights to become key business partners.

Information and systems
Finance collaboration – digital collaboration tools available on the cloud enable and support dialogue across central and local finance teams, the business and other functions, enhancing connectivity.

The direction and impact of digital finance is being driven by the evolution of a new finance toolkit, featuring a combination of modernising technologies that offer substantial but incremental improvements on current activities, and exponential technologies that offer systemic change. Modernising technologies include cloud computing, process robotics (RPA) and visualisation – the visual presentation of complex, rich data through dashboards. Of these, robotics has attracted the greatest attention and level of take up so far. RPA is the automation of transaction processing across technologies: robots or ‘bots’ take care of the recurring processes, tackling them faster and with fewer errors. Sound good? Well, their potential impact becomes even more attractive when you consider that bots work 24/7, are agnostic about ERPs, work at multiples of the speed of trained accounting technicians and they can take on a host of other systematised activities. A single bot can be the equivalent of 3–4 professionals – and they don’t take holidays or get sick! Interestingly we’re beginning to see a reversal of the outsourcing boom as companies look to bring processes back in-house to be delivered by even cheaper bots.

In the longer term though we expect that the real game-changers will be what we’re calling the exponential technologies – advanced analytics, in-memory computing, cognitive computing and blockchain. These innovations will, we believe, recast the nature and fabric of finance. At the conference, it was blockchain that most preoccupied attending CFOs and their questions largely focused on a simple but fundamental question: what is it?

There are whole books and courses about blockchain, so this isn’t the place for a detailed exploration, but, in simple terms, blockchain is a distributed ledger system in which all participants verify and store transactions on a network of connected nodes. Blockchain’s superior levels of integrity are already being used in the authentication of products as diverse as diamonds – thereby addressing the issue of blood diamonds – medical-grade zinc and chicken-meat. What makes blockchain so disruptive is the fact that it is self-validating: because any changes or irregularities in a transaction will immediately clash with the distributed ledger, it obviates the need for involvement from trusted third-party intermediaries, such as banks, securities exchanges or regulators.

The evolution of advanced analytics, cognitive and in-memory computing will enable finance leaders to benefit from better, faster insights – which they use to drive value in the businesses they support. With insights delivered in real-time by systems that can intelligently analyse and interpret huge quantities of complex data, CFOs and those around them will become more strategic, able to identify and unlock value and play an increasingly prominent role in supporting the CEO in realising business strategies. They will be able to do this safe in the knowledge that the bots are handling the transactional side of Finance.

Our 2025 predictions

So, if that’s a quick look at some of the technologies that are set to shake things up in finance, what will the world look like a few years from now, when these technologies have matured and become embedded in our activities? Taking a thematic approach, here are our eight predictions for finance by 2025:

The Finance Factory. Transactions will be touchless as automation and blockchain reach deeper into finance operations.
The Role of Finance. With operations automated, Finance will double down on business insights and service. This will create a capability challenge where some skill sets are no longer required and new ones enter the mix.
Finance Cycles. Finance will go real time. Periodic reporting will no longer drive operations and decisions – if it ever did.
Self-Service. Self-service will become the norm, as users of Finance data become able to access the information themselves. Finance may be uneasy about this.
Operating Models. New service-delivery models will emerge as robots and algorithms join a more diverse finance workforce. Companies will assess the benefits of automation against onshore and offshore operations.
Enterprise Resource Planning. Finance applications and microservices will challenge traditional ERP. Big vendors will be prepared though.
Data. The proliferation of APIs will drive data standardization, but it won’t be enough by itself. Many companies will still struggle to clean up their data messes.
Workforce and Workplace. Employees will be doing new things in new ways, some of which will make both individuals and CFOs uncomfortable.

Simon Martin - Director, Risk Advisory

Simon is a Director within the Finance, Operations and Support group that sits within Risk Advisory at Deloitte. His main area of focus is Finance Improvement projects in the Corporate sector, specifically within the TMT and E&R sectors. He has over 12 years of post-qualification Finance experience. Simon originally joined Deloitte as a graduate, working on a variety of internal audit, risk management and internal control projects. In 2011 Simon moved into industry, joining BP, where he initially worked on a Group wide risk management project, before moving into the Upstream Finance team where he took on a range of commercial Finance roles. In 2016 Simon returned to Deloitte, where he has led a number of projects around Finance transformation and process improvement.

Location, location, location: context, context, context

2019-06-07T10:22:23+01:00

By Rudolf Janssen, Director, Deloitte Netherlands

The outcome of many a process within Family Enterprise Consulting is a written document, be it an agreement, a pre-nup, a last will, a family charter or constitution. Almost never such a document is a stand-alone item. Almost all family and family enterprise related documentation is not only inter-related but also very influenced by the context at the moment of drafting the wording of it. Just like the value of real estate is often a question of 'location, location, location', the real added value of legal documentation, specifically in the private domain, will be determined by its context and the fact that this context is explicitly incorporated in it. It’s all about the context? Yes it is. Let us share a few examples with you.

More and more we invite family members to join hands with us when drafting family constitutions. The preface, dealing with the history of the family and the enterprise, will most of the times be written by those family members in particular who up until then might have experienced a distance between them and the enterprise. This preface also deals with why the family members think a family constitution is such a good idea, written down in accessible wording or even quotes.

The same applies to the detailed clauses of such a long document, written down in, for most, rather unusual language. Examples given by family members, written down in their own words and illustrated by drawings in their own hand, all come in very, very handy indeed.

The added value of this? In doing so, everyone will have a visible contribution to the final document, not only the ‘usual suspects’. In jointly expressing the ‘why’, the ‘how’ becomes more easily a joint effort too. The constitution itself will not only become more robust and less vulnerable to pressure from the outside, e.g. enquiries from in-laws (‘What on earth did you sign that for?’). Also pressure from within the family is less likely to cause damage if in clear, day-to-day language one has agreed to why to have this family constitution and what its purpose is to be. Thus, it’ll be less likely to be confronted by family members who later on appear not to have understood what was going on (‘But that’s not what I understood’).

An appealing way of having everyone join into the process of writing such a family constitution is the use of family sayings. ‘I remember our dad always saying ..’ or ‘Grandmother, in such a situation, always said ..’. Very often these sayings only exist with a particular family and require clarification to outsiders. However typical they might be, they can be used as ideal headings for and/or illustrations of those specific elements of a legal document that provide a legal extrapolation of such a saying.

Even documents that might not require signature of every family member, such as last wills, donations, prenups, can benefit from this approach. We’ll ask family members more and more to give us their views on why this document came into being and why it’s worded as it is and not otherwise. These views then become a crucial element of the final document. All this makes it easier for those not expressing themselves in legal language on a daily basis, to appropriate the content of such a document, despite the ‘legalise’ the author dipped his or her pen in. It also functions as a test to see if indeed one’s expectation, perception and wording do match.

This contextualization of legal documents not only reflects on the content, it also applies to the actual setting of them. A deed of donation might only need to be signed by the donor and the beneficiary in order to close the transaction. The donation might however have a completely different impact on the relations within this family if all other family members would be present and confirm their presence by countersigning the document which would also explain unmistakably that this gift has a particular motivation and purpose other than simply ‘giving away without the others knowing’. Legally the presence and countersigning might have little effect, however one could discuss on whether in applying this method, the legal effect of it in the end might turn out to be less easily challenged.

So, in Family Enterprise Consulting it’s context, context, context that will very much determine the robustness of all agreements. Do join us in writing your family charter.

(We also look forward to hearing ‘your’ family sayings!)

Rudolf Janssen – Deloitte Netherlands

Rudolf specialises in business succession, both in Deloitte Netherlands and at Nijmegen University. He publishes regularly on issues relating to business succession and he is a co-editor of several magazines and publications relating to this subject. Tax incentives for business succession can be instrumental in getting the subject of succession put on the agenda of the family. Other aspects of succession however will need to be determined by the outcome of the discussions within the family of the issues at stake. The Deloitte member firms provide bespoke services on durable family enterprise governance in the interest of all stakeholders of such an enterprise.

Governance: Family businesses are different

2019-06-06T09:04:48+01:00

By Lizzie Hill, Partner, Deloitte

Family businesses are different, and their differences from other forms of enterprise, particularly around the issue of governance, need to be understood and accommodated, especially by chairs. Typically there is a much greater degree of emotion at play in a family enterprise and that emotion is, almost by definition, closer to the surface. While directors of PLCs and private equity houses are often dispassionate, family members feel an attachment to the business that runs deep, and this attachment extends across place, brand, product and purpose.

This emotional engagement can be a powerful differentiator. If harnessed positively, because customers and clients, employees and suppliers all recognise the passion owners feel about their businesses and are inspired and motivated by it. For other forms of business, it can be much harder to drive values and passion through to the day-to-day operations of the enterprise where they will be seen by stakeholders.

Famously, family businesses tend to have much longer corporate memories and are both more inclined and more empowered to take a longer-term view. There is also, unsurprisingly, a more direct link between the personal values of the business leadership and the values of the business itself. This pays dividends in areas such as employee retention, where family businesses typically fare much better than their rivals.

Family businesses often have more streamlined decision-making processes, especially where family members are directly involved in running the business. However, paradoxically, this can lead to an issue in encouraging agents – directors and managers – to behave like family members when none are present and, of more concern, to defer decisions until a family member is present or to regard decisions as only having been made when validated by a family member.

Not only can this focus on family lead to delays, but it can also stand as an obstacle to recruiting and retaining first-class management: what self-respecting, high-quality leader wants to join business where having the right name is the only real mark of authority? For this reason, some experienced chairs advise family members to set the tone, direction and goals for the business and then step back from day-to-day management.

Chairs can offer a lot in this area, and some families will even appoint a chair from outside the family, specifically to introduce a greater degree of independence and to leverage skills and experience from outside the current leadership group. However, in such instances, as well as being appropriately skilled and experienced, it is vital that the incoming non-family chair ‘gets’ the family and the business; that they understand the emotional and personal investments, the personalities and the heritage.

When the ‘fit’ is right, the independence of a non-family chair can be very powerful, both in terms of overcoming familial rivalries, jealousies and sleights and in channelling family members’ emotional engagement. Given the exposed position of a family chair and their need to speak up and when emotions threaten to damage the business, some experienced chairs argue that the best person to be chair of a family business is someone who ‘doesn’t need the job’: the capacity to deliver home truths from an independent standpoint and without fear of disfavour is essential.

The other major area of challenge for the boards of family businesses is succession and this can, of course, also become a highly emotive issue, reviving those long-standing discords mentioned previously and heightened by the unwillingness of senior family members to ever properly retire and give way to the succeeding generation.

One critical advantage that family businesses have is their capacity to be unconventional, to see how big businesses operate and decide to do things differently. This can be especially useful in looking at performance. This role often allocated to finance directors but, in truth, there are other individuals within the business who may have a better understanding of the economic drivers of the business, particularly where, for example, data management is a critical driver of success but where this lies outside the finance function. Family businesses don’t have to follow the herd and are therefore free to make their own decisions.

So, family businesses are different, and, in an era when purpose and sustainability are increasingly coming to the fore, those differences are largely strengths that can deliver real advantage, provided the appropriate governance structures are in place and the boards and chairs are alive to them.

Lizzie Hill

Lizzie is a tax partner in our Deloitte Private tax practice. She is the UK Head of Family Business and also leads the Deloitte Private team in the South West.

Lizzie specialises in advising privately owned and family businesses, as well as individuals, families and business owners. Lizzie has particular expertise in the field of transactions and is one of the firm’s experts on corporate reconstructions – including demergers, acquisitions and reorganisations. She also has particular experience in the field of Business Property Relief, succession planning and M&A.

Lizzie is a Fellow of the Institute of Chartered Accountants in England and Wales.

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Sustainability in a millennial age

2019-06-05T11:02:18+01:00

By Claire Evans, Partner, Deloitte

Sustainability is a business theme that, while being universally accepted as a good thing, has come to have a variety of meanings. From sourcing, environmental impact limitation and working towards the UN’s sustainable development goals (SDGs) to simply ‘continuing to do what you do’, sustainability has become a starting gun and a benchmark for discussions about the future of a business.

But for family businesses, sustainability has an extra level of meaning – and importance. Not only is it about ensuring the business is in a position to continue successfully, it is also about addressing the inevitable pressures and tensions that come with generational change and succession.

The Deloitte Family Business Symposium explored the issue of sustainability with a number of leaders of major family-owned businesses, highlighting a range of opinions and degrees of engagement. ‘Sustainability,’ said one business leader, ‘now permeates every aspect of our business, from ethical sourcing and manufacture to delivery and disposal from an environmental perspective. It has become a non-negotiable.’

While embedding sustainability can mean understanding the environmental impact of your sourcing and distribution activities, it can also mean a recasting of relationships with suppliers. One business leader referenced his family’s decision to insist on an overseas supplier paying its local workers the living wage rather than the minimum wage; in effect, a decision to pay more than was strictly necessary because doing so aligned with the family’s values.

Inevitably, in some cases there will be tension between the drive for profit and for responsible business. However, it can be argued that, in the future, sustainability and profit will become so closely intertwined as to be all but inseparable.

There are already instances where sustainability is an integral part of operating efficiency. For a simple example, instead of manufacturing inefficiently and then having to pay for the subsequent disposal of resulting waste, sustainability can be about driving that waste out of the manufacturing process. At the very least, awareness of sustainability should be pushing businesses to focus on making profit from delivering solutions to problems, not making more problems to be solved.

Sustainability is driving a fundamental ‘rebooting’ of the way businesses view what they are here for – what their purpose is. This overlap between sustainability and purpose – a topic that was also covered explicitly at the symposium – may be best approached by identifying ways that you can influence the world and then being specific about what that means and how it can be realised. Stakeholders are likely to be more interested in and engaged by the impact you have through your products and services than by the way you go about it.

Another theme to emerge from the discussion was the importance of education as part of succession planning. With sustainability growing in importance and relevance, the next generation of business leaders, themselves millennials, need to have a developed appreciation of what the businesses they are taking over are doing to become more sustainable. For some businesses, this equates to a specific education programme on responsible business ownership and the realignment of philanthropic activities with both sustainability and purpose.

Family business leaders are also keen to highlight the importance of building employee engagement with sustainability and, in particular, their philanthropic activities and how they align to the businesses’ values. This can help to build employee engagement, both with the cause and with the business itself, and also help to amplify the impact of philanthropic effort as employees undertake fundraising and volunteering activities in support of the businesses’ commitment.

For some this leads, perhaps inevitably, to the subject of impact investing – investing the family’s money in areas and initiatives that themselves have a positive impact on the world by focusing on environmental, social and governance issues.

One conclusion is that sustainability may no longer be the right word to encapsulate this debate, given the multiplicity of meanings and associations it has acquired. If what we are talking about encompasses environmental impact, continuing to be attractive and relevant to a generation that regards responsible behaviour as natural or expected, and also preparing for generational change in ownership, perhaps we should be thinking in terms of resilience and durability instead.

As sustainability enters the mainstream and becomes ‘normal’, terms like this will give it a harder edge and more accurately reflect its existential relevance. Put simply, in the near future, when millennial concerns and behaviours dominate, businesses that fail to adapt to the sustainability imperative – that fail to hardwire sustainability in processes and behaviours – won’t be businesses for very long. If that sounds ominous, it should because it’s a challenge that is not going to go away. But, it should also be seen as an opportunity. Family business leaders that we have spoken to who have embraced sustainability have found it to be a galvanising force, engaging stakeholders and delivering satisfaction along with profit.

Claire Evans

Claire has over 25 years’ experience of advising business owners, entrepreneurs and other high net worth individuals on all aspects of their tax affairs.

She specialises in succession and exit planning for family businesses, family office, international structuring for UK resident and outbound and inbound entrepreneurs covering diverse aspects such as residence, domicile, offshore trusts, structuring investments and divestments, succession, lifestyle investments, philanthropy and company taxation.

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Making transparency work

2018-07-18T09:30:00+01:00

Whilst the news cycle in the UK might have been periodically dominated by sunshine and sport over the early summer, the complexity of world relations, the economy and the use of personal data have never been far from the headlines. The scale of data and the technology available to interrogate it is driving many new ways of working and that is equally true in the world of taxation.

So, how should families deal with the reality that global tax authorities are moving to connect (and collect) more data than ever before? Over recent years new global information standards have been introduced which require nation states to collect financial information on individual taxpayers and in certain instances to provide that same data to other tax jurisdictions where individuals are tax resident. In addition, there are now broadly adopted standards for unlisted companies and also for trusts to report information about individuals who are connected to them. Families are often concerned about these changes but I like to remind them that these provisions which are driving transparency over personal financial data to drive more accurate tax reporting also offer an opportunity for the family to reflect on their global financial footprint and to develop a broader tax strategy that is fit for purpose.

Where to start? How to respond?

The first step is to map financial assets - knowing where each family member is tax resident, what they own, and whether ownership of any assets is shared amongst family members. This sounds simple, but cousins, spouses and children in established families could run to the hundreds. I had one conversation where no-one in the family was sure how many members they had, but at the same time were sure that assets were held in common – a real challenge! Without this foundation, a family might give mixed messages to tax authorities, increasing the chance of investigation.

Clarity of purpose

Once a family (or their family office) understands the wealth pool and family structure, it can move to clarifying important principles. Two to flag are:

Awareness of the global tax reporting as a result of the location of assets, income streams and family members together with an understanding of what information will automatically flow to which tax authorities.
Understanding the need for a family approach around tax governance.

Debate might identify differing views across the generations or branches of the family in respect of tax reputational risk, but unless all members of the family understand the need for a strong approach to tax governance, crucial information may be lacking for deciding asset disposals, potential co-invest partners and personal tax filings. In a world where tax reputational risk is high, the price of missing this conversation could be a tabloid headline.

What if there was a global tax audit tomorrow?

If matters go public, media scrutiny isn’t the end of it. In a possibly apocryphal tale, one tax audit was allegedly triggered by reports of a traffic accident involving an allegedly non-resident individual.

With tax authorities having both increased access to a family’s data and new techniques to check that data, tax audits can be opened swiftly. Additionally, cross-border data sharing means that a tax enquiry is increasingly likely to be part of a global initiative, triggering higher stress and professional fees for the family. This can be significantly mitigated if a family knows clearly before any audit where data is held, when it is updated and how it can be disclosed. If a global tax audit happened today, how prepared would you be?

The practicalities of reputation management

And finally, some practical advice. It’s never been more crucial for families and the family office to have up-to-date advice, appropriate due diligence and tax governance reviews. If I had a pound for every time a client said “it’s fine – I just can’t find the paper to prove it”, I’d have needed my own family office years ago.

Annis Lampard – Deloitte UK

Annis is a director in our Deloitte UK tax disclosure and transparency team who works with private wealth and private companies to understand their relationship with HMRC. Working with clients in a range of situations, from dispute resolution to voluntary disclosure or building a clearer tax strategy, Annis draws on her experience as a former HMRC inspector to find the solution that is most appropriate for her clients.

She is a member of STEP, of the Tax Investigations Practitioners Group and has spoken at industry conferences about global information exchange programmes and the changing tax landscape. A key part of Annis’ focus is about the personal and reputational impact caused by tax misunderstandings with revenue authorities, but she is also part of a mixed-disciplinary team of specialists covering direct taxes, indirect taxes and tax litigation that also covers financial negotiations and legal disputes.

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Smarter share capital

2018-06-27T09:46:38+01:00

Families are usually a complex mix of individuals with different abilities, attitudes, aspirations and financial needs. Each family member is likely to want different things, and in the context of a family owned business, this can produce tension and discord.

A well advised family business will, of course, go to great lengths to get a sound understanding of the different aspirations of the family members, to attempt to achieve a degree of alignment of ‘aspirations’ and ‘outcomes’, and then to document (formally or informally) the findings and any agreed strategy.

However, we find that the most effective strategies are under pinned by ‘structure’. We have also found that the share capital of the family business can be the right place to start.

What do we mean by ‘share capital’

Assuming the family business is carried on through a company, the shares owned by the family, and the rights that come with those shares, may well be the primary interface between the family owners and the business itself.

The rights attached to share capital are principally set out in the constitutional documents of the company but are also determined by company law. The main rights might include some or all of the following:

Rights to share in the capital value – i.e. the right to a proportion of the underlying ‘value’ of the company. The shares may have a fixed capital value (usually called preference shares) or their value may vary as the value of the company grows or shrinks (usually called ordinary shares).
Rights to dividend income, which again may be fixed or variable.
Rights to vote, i.e. to control.

BUT not all share capital needs to be the same; the shareholders of a company can determine how rights are shared between them. This means different types of share capital can be used by families to spread risks, rewards, control, etc. between the family members in different ways.

Whilst not something that appeals to all families, creating multiple classes of share capital can help family members realise different personal goals, whilst all members still retain an interest in the family business. This can have obvious advantages such as protecting family unity or in the UK context, maintaining the valuable Business Property Relief.

Given the almost infinite variety of share capital that can be created, and the fact that the form of share capital can usually be changed quite easily, it may seem surprising that many family companies still only deploy one type of share capital. Each share owned by any family shareholder - regardless of age, risk profile, financial needs and level of active engagement - will carry the same rights as any other share. One class of shares is often seen as a way of maintaining ‘fairness and equality’ amongst family members. This is an important point for many families that I work with but equally, such a structure can ignore that not all family members necessarily want the same things!

A Simple Example

ABC Limited is a family trading business owned by the A family. Mr A founded the business 60 years ago and worked in the business as an extension of his life, but sadly died last year passing all his shares to Mrs A. Mrs A is now 82, has variable health and needs a regular income – she has no appetite for risk. Mr A and Mrs A have two children, who couldn’t be more different.

Son, the eldest, has always looked up to his father and wanted to follow in his footsteps. After a period of working outside the business, he now works full time in the family business as CEO. He is 55 and has two children – now 17 and 12.

Daughter has no interest in the family business and has always seen it as bit of a nuisance – she has pursued a very successful career in Australia and is married to a top lawyer in Sydney. They have no children. Mrs A wants to pass shares to her son and daughter – she wants to be fair, but wants to protect the family business.

A single share class structure

Suppose they maintain a single class of shares with Mrs A passing 40% of her shares to each of her son and daughter. Mrs A would retain 20% of the votes, dividends and value but her investment would be at risk of fluctuations in value. She also has no certainty of dividends, which are paid at the discretion of the Board and whilst she can vote, her health precludes her from actively participating. Son holds 40% of the shares, but cannot control, needing his sister’s co-operation to achieve anything. Looking to the next generation – things look even harder.

Creating different share classes

Suppose the shares are split as follows, with everyone holding the same initial value, but with rights more closely aligned to their respective wishes:

Mrs A holds preference shares with a fixed value and fixed dividend rights, they do not vote. They provide her with a steady, secure income stream and the value of her investment is fixed, consistent with her risk appetite. In the UK the investment should also continue to qualify for Business Property Relief, allowing her to pass the shares on to the children (or even grandchildren) free of tax cost assuming the rules remain unchanged.
A ordinary shares – which carry 50% of the remaining value and 50% of any variable dividends, if declared but 100% of the votes. These are held by Son, allowing him to control the company but sharing value fairly with his sister.
B ordinary shares – which carry 50% of the remaining value and 50% of any variable dividends, if declared but crucially carry no votes. These are held by Daughter allowing her to share value fairly with Son but requiring no active participation or control.

Of course detailed legal and tax advice should be sought prior to implementing any such arrangement and such a share structure cannot solve all the challenges of a complex family situation and needs careful consideration as part of a broad understanding and analysis of a family’s holdings, operations and ambitions. Further thought is almost certainly also going to be needed in the future (what happens, for example in generation 3?).

In conclusion, whilst an overly complex share capital structure can, of course, create confusion, I would suggest that businesses should consider reviewing whether their share capital structure is still optimal, especially as ownership passes from one generation to the next.

Lizzie Hill – Deloitte UK

Lizzie is a tax partner in our Private Markets tax practice and has been with Deloitte for 15 years. She is Deloitte UK Head of Family Business and also leads the Cambridge Business Tax team, a team of 80 tax professionals, which is widely renowned as a centre of excellence for Private Markets for Deloitte in the UK.

Lizzie specialises in advising privately owned and family businesses, as well as individuals, families and business owners. She has cross tax expertise across corporate, personal and shareholder tax allowing her to provide a holistic service to both company and shareholder - particularly important to private owned and family businesses. Lizzie has particular expertise in the field of transactions and is one of the firm’s experts on corporate reconstructions – including demergers, acquisitions and reorganisations. She also has particular experience in the field of Business Property Relief, succession planning and M&A.