Family Businesses Often Overlook Risks To Family Members

Your family business may be well protected from risks but what about your family members? Could the family business do major damage to the family? Are there risks you can remove or protect against?

Senior man who owns a house painting business in his shop.

A new family business study indicates that most family businesses lack a regular risk management process that covers the entire enterprise including risks to the family. A report in the May/June 2015 Family Business magazine on the Crystal & Company and Family Office Metrics study said the study found only 30% of the 159 online survey participants have an enterprise-wide risk management process.

This concerns me because some business owners focus so well on their business that they can miss the great financial impact that a family business risk could have on one or more family members. Linda Bourn, an executive managing director at Crystal & Company, says that the higher performing family businesses do have plans that are not limited by company, business unit, or family branch.

Three Steps To Protection

How do you assess how you’re doing in this area? Start by evaluating where your risks are. Many family businesses overlook risks like identify theft and family member liability when the family member serves in roles such as trustees. Look for those areas of risks that you’ve never considered. Then realistically think about the potential and the impact of that uncovered risk.

Once you know all the risks you need a plan to manage them. That’s step two. Be sure to plan for risks that could affect the family’s tangible assets and those related to family member activities, roles, and responsibilities.

The third and final step is to reevaluate your plan every year or so. For example, without a review it’s easy for the family’s insurance coverage to not keep pace with the family’s growth.

I like Family Office Metrics’ “Risk Review Framework.” The New York-based family office consultancy divides risks into four categories:

    1. Monitor
      These are lower impact risks that you should watch. Examples are governmental and other external regulations that could affect the family business.
    2. Insure
      These risks are high-impact risks that are hard or impossible to control. Insurance is the best bet here. Examples are natural disasters and hazards.
    3. Manage
      These risks are also high-impact but they can be controlled. Your family business should address these risks at an executive level and through company processes. For example, you can and should control the future management of the family business through succession planning.
    4. Process
      Again, these are high impact risks but what makes them different is that you can readily control them. The risks involved in wire transfers of funds could be an example. Your company policies and procedures should cover these risks and someone should have direct responsibility for monitoring them.These risks are also high-impact but they can be controlled. Your family business should address these risks at an executive level and through company processes. For example, you can and should control the future management of the family business through succession planning.

Perhaps the most useful part of the study is a set of risk management best practices. See if your family business has these practices in place:

  • Controls exist for determining and managing trust and fiduciary risk
  • Family members are involved in the risk identification and planning process
  • There is a defined business continuity plan
  • Your risk management plan is not just limited to the company, business unit, or family branch
  • You have a strategy for mitigating cyber-crime, invasion of privacy, and identify theft

I’ve seen family businesses fall prey to preventable financial disasters. Knowing your risks and having a plan in place to minimize those risks is an important strategy for the long-term health and success of the family business. And think beyond your business so you include risks that could affect family members. Talk to your business advisory team about your risk management process.

You can learn to be a better investor, protect your business, and build a more comfortable retirement through books like Money: Master The Game, my ebooks, or other books. Just try to continually become less of a consumer of money and more of a protector and grower of money.

Gene Thomas Offredi, CFP®, RFC™. Contact Gene on the web or by phone at 203.453.1017. Summit Investor Coach, LLC is a Registered Investment Advisor. Download my High Net Worth Individuals Retirement Series.