Transaction Considerations

M&A transaction structures of a family office can, in many cases, be indistinguishable from their traditional private equity counterparts, with tax, legal and accounting considerations driving the majority of the structuring conversation. Unlike the traditional private equity fund, however, family offices have no accountability to outside investors looking for a return on capital over a defined time horizon and have the luxury of being able to invest patiently on behalf of family members and future generations who are less focused on an immediate return.

Family members, as well as their investment professionals and advisors, should therefore consider the following when structuring any M&A transaction on behalf of a family office:

• Investing philosophies and concentration on certain asset classes based on a family’s business legacy and the background of a family office’s investment professionals.

• Strategic objectives determined among family members and any outside advisors tasked with responsibility for governance of the family office, aligning the family’s interests through a disciplined approach to investing and communicated through the office to the family as a whole.

• The degree of tax sensitivity for the family office in the M&A context if an indefinite hold period is contemplated, short-term capital access needs are low, or a basis step-up might otherwise later be achieved, for example through the efficient use of family members’ excess estate tax exemptions at death.

•The degree of leverage desired to be obtained through third-party lender involvement, versus direct sourcing of leverage from capital within a family office.

The level of wealth that gives rise to the need or desire for a family office will likely last for generations on end, and capital for each transaction within an office structure should therefore be allocated to account for how that wealth should benefit the family’s constituents. A combination of debt, preferred equity and common equity, being mindful of the income tax and transfer tax consequences of each, should be deployed to accomplish this objective.

Before structuring a family office or any of its underlying transactions, investment professionals and their advisors should always conduct a thorough front-end analysis of the family’s investment objectives, economic and otherwise.

John Gilson is a Member at Moore & Van Allen. Thomas Cooper is an Associate at Moore & Van Allen.

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