TO WHOM IT IS ADDRESSED

We target Family Offices, i.e. service companies that manage the assets of one or more families, acting as a coordination centre for their financial and administrative management.

We then turn to all parties who can intervene to manage a Family Office issue, such as:

• Family Officer
• Decision Maker (Owner, CEO, CFO)
• External consultants
• Accountancy firms
• Legal and Notarial Firms
• Banks, Insurance Companies
• Other external parties involved

TYPE OF GOODS

The assets are all those pertaining to family assets, such as:

• Real Estate (Land, residential, commercial, etc.)
• Companies
• Art collections (paintings, cars, etc.)
• Protection items
• Assets

FAMILY OFFICE: DEFINITION, ACTIVITY

Family offices essentially perform three basic functions:

• specialist planning and advisory services (including financial, tax, strategic and philanthropic advisory services)
• investment management (including asset allocation, risk management, investment analysis and due diligence, as well as assistance in all transactions and sales of assets)
• administration services (including management of relations with service providers, bookkeeping and more relational services between family members, in their capacity as beneficiaries of the estate, etc.)

Family offices can perform services for a single family or for a community of families (the multi-family offices or Multiclient family offices). In the Anglo-Saxon world, multi-family offices generally do not follow more than 12 families while in Italy some family offices have relationships with more than 30 families.

FAMILY OFFICE MODELS

Single-family office: follow a single family (it is estimated that the assets needed to support the costs of a family office are over $100 million).

Multi-family office: follow several families and historically they have arisen from the lower cost per family (depending on the size of the assets) or from the merger between single-family offices.

Multi-client family offices, also known as private investment offices. These stemmed from the emergence of specific customer demands from the Private Banking divisions of banks that required services with a higher content of specialists and dedication. They are in effect extensions of Private services and are not tied to specific families.

FAMILY OFFICE: TYPE OF OPERATIONS CONSIDERED

The types of operations carried out are typical of the:

• Private Equity
• Corporate Finance
• Real Estate
• In addition to the classic ones 

and some typical of Asset Management and Investment Management, such as:

• Division of an Estate among several Heirs in a Real Economy
• Evaluation of the optimal yield of an asset
• Evaluation of the streamlining of an asset
• Asset Allocation
• Economic and financial analysis of an investment
• Risk Management  

THE FAMILY OFFICE IN ITALY:

Family offices are particularly well developed in the sophisticated American market where there are no "certain" figures but it is estimated that there are over 4,000 family offices and they are developing in Europe where it is estimated that there are over 500 family offices. And there is no specific or single definition of a family office.

In Italy, there are more than 100 structures that can be traced back to the family office model, with directly or indirectly managed wealth of around 70 billion euro, which has continued to grow in recent years.

The awareness that wealth, assets, should be optimized with ad hoc consulting services is becoming more and more widespread, thus allowing the role played by family offices, increasingly protagonists of financial advice to be enhanced. Of course, at least at a technical level of pure family offices, they are formally the ones owned by a single family and for this reason they are rare at least in Italy, given the need to hold assets in excess of 100 million to justify the high costs.

Having said that, however, the sector in Italy continues to grow, albeit moderately. At the end of 2018, the number of structures offering family office services in Italy rose to 139 units, for an asset under advisory of 78.9 billion managed by a network of 729 family officers.

These are the main findings of the latest survey conducted by Magstat and previewed by MF-Milano Finanza.

The first ones in Italy are in a clear minority (28 have been recorded ) and basically deal with the administration of the assets of a single family that is also the only owner of the structure.

Multi-family offices, on the other hand, offer services to a group of families who may or may not be shareholders in the facility. In Italy there are 111 of them. Within this category of multi-family-offices, a further division can be made between those that offer services exclusively to their shareholders and others that are open to other families. In addition, some multi-family offices were created as an evolution of a single family office structure, while others are of banking/financial origin (Mps Family Office, Ubs Family Office) and are to all intents and purposes extensions of private services and are not linked to specific families.

However, looking within the structures, most of the single-family offices have chosen the legal form of a corporation (Spa or Srl), while several independent structures have deemed it necessary to open a Sim or an SGR, others a trust company, and still others a trust or a holding company. In particular, 57 are SpAs (public limited companies), 54 SRLs (limited companies) 19 operate as associated firms and 7 are Ltd.

At shareholder level, some are owned by a single family, others owned by several families, some owned by a group of independent professionals (consultants, lawyers, accountants) and, finally, those owned by a bank or financial institution.

For example, a family office has set up a SIM under Italian law, a static trust company, a dynamic trust company, a speculative SGR, a foreign management company and an Irish company with an umbrella SICAV.

Other Italian structures have preferred one or the other form, even if it must be said that the structures that have chosen the form of SIM or SGR guarantee greater confidentiality and offer the possibility of direct access to the market without financial intermediaries.

But the family office service can be provided by a bank or even by an associated firm made up of accountants, lawyers, notaries and business consultants. 

(Source: Milan Finance)

WHAT ARE THE IT TOOLS USED BY FAMILY OFFICES?

Apart from the classic management systems for the reporting of profit and loss accounts and balance sheets, the predictive systems used are essentially the models created on an Excel spreadsheet.

Excel spreadsheet

It is the tool that has been adopted for the analysis and verification of sustainability and profitability of a business model for about 30 years, with all the conceptual limitations, which make it unreliable for such complex and systemic analysis as the evaluation of an asset, an investment. We will see in detail the reasons why. However, let us specify from the outset that the Excel spreadsheet is not even considered to be an information system, although many cases of pre-configured Excel templates are often seen on the market as software.

THE LIMITS OF EXCEL SPREADSHEET TECHNOLOGY

Unfortunately, the answer is no, as the average reliability of any Predictive Model made with Excel spreadsheets technology, regardless of the skill of the analyst who made it, is on average 15-20%!

Let's see the reasons, discovering that, in addition to the lack of Reliability, there is also a lack of Opportunity and Profitability for investments managed with Business Plans made with Excel.

LACK OF RELIABILITY

The average reliability of of financial valuation operations within a "Family Office" carried out using Excel spreadsheet technology, independently from the competence of the analyst who elaborates it, has been measured on a large number of elaborated BP, created for "Corporate Finance" operations and has been found to be around 15-20%.

An approximation of about 20%, in the best case scenario, means that each result obtained has a reliability of 20% or, in other words, has a margin of error equal to its complement, i.e. 80%. This means, for example, that a Cash Flow value of €1,000,000, calculated in this way, ranges from a value of €1,000,000+/- 800,000, i.e. €200,000 to €1,800,000. 

This type of approximation highlights a problem of reliability of the expected value of the financial operation, but even more of precariousness to make the correct decisions that have a fair economic and financial impact on it.

Let's see the structural reasons for the inadequacy of an Excel Spreadsheet due to the limited opportunities it can offer in the management of the various "Family Office" operations:

ANALYSIS ON AN ANNUAL BASIS:

of the Business Plans developed, is one of the most unmistakable causes underlying unreliability, for these reasons:

Cash that is always positive, on an annual basis, may, in fact, turn out to be negative for most months with the need to cover it with Bank Lines or a capital increase. The NPV values obtained are therefore unreliable. 

An annual-based cash flow prevents visualization of tax payments, dividends in specific months, preventing evidence of critical liquidity issues, which become essential to obtain preventive financial coverage.

LACK OF A SYSTEMATIC APPROACH:

due to the inability of Excel spreadsheet technology to take into account all the variables inherent in a given context such as, for example:

The VAT rates associated with each variable that enters the model.

Payment/collection days 

The different tax rates

Risk variables, not taken into due consideration.

VAT MANAGEMENT PROBLEM: 

is in most Business Plans handled incorrectly or insufficiently, due to the inability of Excel technology to take it into account.

A striking case was when, in a BP relating to the acquisition of shares made by an investment fund, VAT was considered as an accounting clearing entry, but not a financial one. Obviously, the investor was in serious trouble..

In many of the BP cases analysed, we found only vertical VAT compensation, but not horizontal compensation, meaning investors waited a long time for receive VAT refunds, resulting in financial distress 

In many BPs, the possibility of creating a financial line for VAT is not even used, since the cash flow is not regularised 

WORKING CAPITAL PROBLEM (DUE TO DIFFERENCES BETWEEN PAYMENT AND COLLECTION DAYS):

in most cases the Business Model is ignored not for competence problems, but due to the impossibility of managing it on an annual and not monthly basis.

On a financial operation, made by a renowned consulting firm, which certainly had the knowledge of the working capital, but was unable to represent it on Excel spreadsheets on an annual basis, generated a financial problem of 700,000€ on an investment of about 3 million Euros, which would have completely disregarded the investor’s financial expectations. 

PROBLEM OF THE LACK OF CERTIFICATION OF THE ALGORITHMS USED:

due to the lack of reference to sources declaring their correctness, which is an important element that every Investor/Entrepreneur should require. Certification is required for wine, for oil, but not for BPs, which decide on the analysis of investments or strategies worth millions of euros.

In a Due Diligence it was asked which algorithms were used and by whom they had been certified. It turned out that different algorithms were used for the same function and, moreover, when asked what the sources were, the answer was: the experience of the person who had drawn up the Business Plan. Of course, the deal was off.

COMPLEXITY-RELATED ERROR PROBLEM:

due to the fact that the more complete you make the BP model on the Excel sheet, the more the probability of error (of formula, of not connected cell, of calculation, etc.) increases, making the results unreliable.

Two well-known professors at MIT drew up the three-year plan of works to be done for a major government department. Unfortunately, a university student at MIT, after a few months, disavowed the BP/PEF for having found a trivial calculation error, but one that rendered the calculations unreliable, and also causing serious damage to the image of the government and the two distinguished professors. 

THEREFORE, THE "EXCEL SPREADSHEET", TO REALIZE THE BUSINESS PLANS FOR "PRIVATE EQUITY" OPERATIONS IS THE FIRST RISK, EVALUATED ON AVERAGE AT 80-85%.

LACK OF OPPORTUNITY

The possibility to manage the different cases that a valuation, asset location, investment financial operationl can offer in a flexible manner, is very limited with a BP drawn up using Excel spreadsheet technology, as this technology does allow models to be developed that can thoroughly simulate the different economic and financial aspects of reality.

In fact, to reproduce the different assumptions on Excel soreadsheets, means re-customizing the model each time, with consequent time-wasting, making operativity impossible.

However, not managing them means not being able to translate the entrepreneur's/investor’s ideas into reliable financial economic data to find the best solution.

What does this limit mean for the investor? It means missing out on business opportunities that can range from a few thousand to millions of Euros.

Let's look at the structural reasons for the inadequacy of the Excel Spreadsheet due to the limited number of Opportunities it can offer in the drafting of a Business Plan:

DIFFICULTY/IMPOSSIBILITY IN BREAKING DOWN A BUSINESS MODEL INTO ITS BUSINESS UNITS 

due to the complexity that would be induced in the Excel model to handle them. In fact, the Business Unit represents the minimum unit of analysis with its investments, costs and operating revenues, used to break down the operation into its operating lines in order to allow the investor to decide priorities in investments, on which business units to focus attention and operate.

An MBO of approximately €12 million, processed using Excel spreadsheet technology, proved inadequate in the divestiture of certain divisions of the company, due to the fact that the model was monolithic.

DIFFICULTY/IMPOSSIBILITY OF ANALYSING A BUSINESS MODEL IN ITS VARIOUS SCENARIOS

based on the different assumptions, having to work on the formulas which is time consuming and increases the possibility of errors.

We cite the case of a Venture Capital project, elaborated on a spreadsheet, in which the calculated scenarios did not correspond to the economic/financial reality that later emerged, with serious problems for the investor.

DIFFICULTY IN EXAMINING COMPLEX OPERATIONS

which, with Excel spreadsheet technology, would become so approximate as to be unreliable.

It was not possible to perform a complex MBO company acquisition operation on Excel, which implied the breakdown of the company into its divisions, the analysis of investments, the reduction of costs, the analysis of  revenues, the restructuring of debt and the analysis of three possible Industrial Plans, but it was possible to examine it successfully with "Finance Atena".

DELEGATION DIFFICULTIES

due to the fact that in the BP created using spreadsheets, the data are wired with formulas and therefore only the person who has drawn up the Economic Financial Plan can work on it with all imaginable limits and cannot delegate to other departments.

In acquisition processes, time is of the essence and therefore having delegated possibilities of loading data into the analysis model becomes important.

LACK OF PROFITABILITY

A Family Office financial operation (such as, for example of Private Equity, Corporate Finance, Real Estate, Equity management and investment management) for the evaluation of the optimal yield of an asset, evaluation of the streamlining of an Asset, Asset Allocation, elaborated with the spreadsheet, in addition to having a Reliability of 15-20% and therefore not meaningful in order to analyze seriously a financial operation of hundreds/millions of euro, of great impact on the investor, introduces this recurring issue:

OVERESTIMATION OF SOURCES TO COVER INVESTMENTS (EQUITY, BANK LINES, SHAREHOLDER FINANCING)

due to Excel technology, because it does not allow financial optimization of cash flows, which is instead possible by breaking down the Company Model into Business Units, by managing flows on a monthly basis and by managing self-financing, which is too complex to reproduce using Excel technology. This causes an investor to waste useful capital that he could use in other ventures and also reduces the project’s profitability, decreasing the shareholder NPV.

For this problem, an acquisition of a stake was overestimated by an extra 3 million Euros, calculating an unreliable shareholder NPV.

SUSTAINABILITY IS ALWAYS CRITICAL

because it doesn't take into account all the financial variables involved. The reasons for these results are mainly due to the fact that a predictive financial economic analysis is a very complex analysis and it is inadequate to try to translate it on an Excel spreadsheet due to its structural limitations, due to the problem posed.

Sustainability on an annual basis is critical in most cases as it does not take into account cash flows on a monthly basis, creating unrealistic expectations and, ignoring the necessary hedges, leading to an underestimation of the debt.

UNFULFILLED PROFITABILITY

due to Excel technology that leads easily to calculate NPV and IRR values, but the problem is not obtaining these values, that are obtained very simply using Excel functions, the problem is upstream, from which cash flows they were obtained. Precisely for this reason, the values obtained never correspond to reality, constituting a problem for everyone, first and foremost for the investor.

Profitability is always overestimated compared to the reality of the facts, always disappointing the expectations of the investor who pronounces the fateful phrase at the end of the operation: "I thought I would earn more, or, the accounts don’t add up, etc..