Better than ‘bank of mum and dad’: How to best support family ventures

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This is Part 3 of a series about a governance tool called the Family Bank. Families use it to screen opportunities in both business and non-business pursuits. See Part 1 here and Part 2 here.

The following wealth equation is helpful when mathematically describing the opportunity (and responsibility) to deploy family resources with an intentional focus on building a more successful family:

FW = R(HC + FC)

In other words, your Family Wealth is the product of your Resources multiplied by the quality of your Human Capital and Family Culture.

When I first started speaking about the Family Bank, I used the term “financial assets” instead of “resources” as the amplifier in the wealth equation because I was focused specifically on capital deployment. Yet time is our most precious resource. The ability to find the time and attention to apply toward amplifying your family’s future is surely one of the greatest treasures of financial fortune.

So use that time wisely, wealth stewards. We all know how difficult it is to build a stronger family. Doing so certainly seems rarer than building strong businesses!

I often use the term “intentionality” to describe a family’s focus to do the hard work of building a stronger family. James “Jay” Hughes, the renowned advisor to wealthy families, describes intentional families as “plus 1 families,” whom he tries to work exclusively with, unlike families who are ambivalent or ignorant to the need to work on their cultures (he calls them “zero families”) or the dreaded “negative 1 families” that are actively destroying themselves.

That last kind often ends up in headlines and litigation, like this fascinating family.

So how disciplined is your family about thinking and acting in an intentional way to build “anti-fragility”?

An excellent exercise applying time to family culture is building your Family Bank policies. Doing so provides a nice overlap with traditional family-governance strategic foci, such as mission, vision, values and constitution, with the specific goals of the Family Bank in governing capital deployment into financial and non-financial pursuits.

In the first instalment of this series, I introduced the concept of the Family Bank, a governance tool that enables enterprising families to steer investment into both business and non-business opportunities. In the second part, I explored how we can apply value to non-moneymaking pursuits and thus amplify human potential and our family cultures.

Introducing ‘decision gates’

In the third part, let’s explore the steps a family would take to evaluate a capital deployment proposal and reach a decision. These “decision gates” make up a component of the Family Bank’s investment policy statement.

Gate 1: The family member leading the proposal presents a written-out, short and high-level view of the opportunity, how this opportunity is intended to develop the specific growth goals for the beneficiary, and how those growth goals align with family goals and values. The submission of the report requires the family to name the review committee, which could include family and non-family members (ideally with expertise in the pursuit and/or a close relationship with the family).

The remainder of the gates will describe all pursuits generally, both financial and non-financially motivated, and if the gates are developed properly, a non-financial pursuit and a financial pursuit will both be treated fairly.

Gate 2: The review committee is introduced to the stakeholders of the pursuit. If the pursuit involves a team in addition to the family member, the team is also introduced. Ideally, the management team submits a business plan (for a financial pursuit). For non-financial pursuits, the “business plan” is a description of the pursuit, a general overview of the industry the pursuit derives from, and the value that the family member intends to derive from the pursuit.

Gate 3: This is the due diligence gate, where the beneficiary’s projections for the use of capital are stress-tested. Obtain references on the proposed team and/or service providers. Consider demanding specific professional development tasks for the beneficiary in support of the pursuit. Obtain industry-specific advice on effective capital allocation.

Long-term strategic decisions should be delivered to the committee at this stage. The family should determine the probability that the loan is sufficient to reaching the next milestone for the beneficiary’s goals. Identify what parts of the family’s ecosystem can de-risk the opportunity as much as possible (or maximize the likelihood of success in meeting the beneficiary’s goals) and integrate ecosystem involvement in the opportunity as a condition of the loan or gift.

Gate 4: Co-approved summary. The review committee members and the borrower agree upon an investment summary to be delivered to the Family Bank investment committee (possibly the same people as the family counsel) to review.

Gate 5: Family counsel review/proposal refinement. Deliver the investment summary to the family counsel. Answer follow-up questions (one round of questions recommended). Consider having the borrower present the summary to the review committee. The committee is entitled to refine the loan or gift request at this stage.

Gate 6: Capital decision. A denied loan or gift results in no presentation to the greater family. An approved loan or gift results in presentation to the greater family to convey the application of the family’s values enumerated in the Family Bank Investment Policy Statement and to deliver the terms of the family’s “shared investment” policies. Consider appeal processes.

Finding value in discipline and detail

If this level of detail sounds like too much, then it is possible your family culture values discipline less than others do. Like making your bed daily, the action is not the most valuable facet (although made beds sure are better to get back into!). No, the real value from making your bed daily comes from adding discipline to your life and finding comfort in the ritual. The recommendations above add discipline to an ad hoc “bank of mum and dad.” The value accrues over time.

Adding this amount of governance and discipline to deciding how to deploy capital has benefits. Family members will find comfort in the due process, making both “yes we will finance” and “no we won’t finance” equally loving and in a best effort to continue to grow a successful family.

A family member who receives a “no” from the bank of mum and dad cannot help but wonder whether emotional reasons are at the heart of the “no,” since there is no defined process.

Perhaps the most important aspect of the Family Bank lies in the details of what happens after capital deployment. Celebrating the highs and the lows of the family member’s journey is really important. There should be explicit notes in the loan or gift requiring shared knowledge and growth.

I remain a “culture eats strategy for breakfast” type who values storytelling, rituals and celebrations as the most important elements of a family culture. Yet I also value policy and formal governance, and I believe the Family Bank is quite possibly the best formal governance tool a family can develop.

Adam Hoffman is a trustee and advisor to families. His mission is to empower entrepreneurial families to thrive for generations. He is based in Calgary. His newsletter Family Office Perspectives can be found at adamhoffman.net.

More from Canadian Family Offices:

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• Paying the absolute lowest in tax no longer top priority for today’s families
• How to short-circuit family disputes, avoid a ‘Succession’-worthy mess

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