One company, one family: the arithmetic of a concentrated estate

Concentration is not a mistake made by these families. It is the reason there is anything to advise on. A founder who diversified early would not have built the position that now needs managing. The question a private-wealth adviser is actually asked is narrower and harder: how much of a single operating asset should a family still hold once the next generation has no operating role, and how is the reduction carried out without damaging the company that produced the wealth in the first place.

The first step is almost never a sale. It is a valuation the family believes. Most closely held businesses are carried in family accounts at a number derived from an old transaction, a filing or an adviser's convenience, and every subsequent decision inherits that error. Our practice is to establish an independent view of enterprise value, refresh it annually, and show the family the whole balance sheet with the company marked at that figure. A number people trust changes behaviour more than advice does.

The second step is liquidity that does not touch ownership. Dividend policy, related-party debt, surplus property and unused borrowing capacity in the operating company frequently release more cash than a minority sale would, and they do it without introducing a new shareholder. We work through those in order of reversibility. A dividend can be reduced next year; a shareholder cannot be removed. Sequencing by reversibility is the discipline that keeps early decisions from foreclosing later ones.

Only then does a family reach the instruments: a minority recapitalisation, a partial secondary, a staged sale to management, an employee ownership structure or a full disposal. Each carries a different consequence for control, for the borrowing capacity of the company and for the tax position of members in the jurisdictions where they are resident. The firm does not favour one. It insists the choice is made against a stated target holding rather than against an offer that happened to arrive.

Governance decides whether any of it survives contact with the second generation. A family holding a single dominant asset needs a forum where decisions are made and recorded, a policy for how members exit, and a settled answer to who speaks for the family to the company. Where those exist, a concentrated position can be held safely for another decade. Where they do not, the concentration is a dispute waiting for a trigger, and the trigger is usually a death or a separation.

The firm brings the same four tests to a family balance sheet that it brings to its own. Is the advantage structural, which for an operating company means asking what actually stops a competitor. Can it be converted, and over what period. Is holding it the best available use of the value it represents. And what loss is the family prepared to accept, stated as a number before the market tests it. Families that answer the fourth question early make better decisions later.

Published 2021-06-16 by the Private Wealth & UHNW division. Research is prepared for eligible counterparties and does not constitute advice.