There is a familiar aphorisim- Shirtsleeves to shirtsleeves in three generations, which describes a familiar pattern of family owned enterprises to fail by the time the founder’s grandchildren have taken charge.
What does it take to successfully transfer your business to 2nd generation family member(s)? How about third generation and beyond? If it extends to 7 generations and you have a 100 year old business and you have succeeded in establishing a family dynasty. You have preserved family wealth. Sounds like an impossible feat considering that 70% of family-owned businesses fail or are sold before the second generation gets a chance to take over.
According to James E. Hughes, author of Family Wealth, it is possible with the right approach; include a spiritual component. I’m not necessarily talking about bringing the family to meditate deep in the Himalayas, although it sounds inviting to me; I’m talking about defining what the purpose of family is. For Mr. Hughes, family purpose is all about insuring the happiness and well-being of each of the individual family members. Without this mandate, the business, and along with it, family wealth eventually will be broken. Kind of like an old worn out guitar string which eventually breaks.
The Music instrument industry have their own heroes. Stores like West Music, Strait Music and Alamo Music have all transcended the 2nd generation. In so doing, each in their own way, were able to figure out how to keep the family harmony.
What are some of the risks to the preservation of family wealth?
Procrastination. This isn’t simply a matter of failing to plan, but also of failing to respond to acknowledged financial weaknesses.
For example, let’s say we have a music retailer owner named Alan. The named beneficiary of Alan’s six-figure savings account is no longer alive. While Alan knows about this financial flaw, knowledge is one thing and action is another. He realizes he should name another beneficiary, but he never gets around to it. His schedule is busy, and it is an inconvenience.
Sadly, procrastination wins out in the end and as the account lacks a beneficiary, those assets end up subject to probate. Then his heirs find out about other lingering financial matters that should have been taken care of regarding his IRA … his real estate holdings … and more.
Minimal or absent estate planning. Every year, multimillionaires die without any leaving any instructions for the distribution of their wealth – not just rock stars and actors, but also small business owners and entrepreneurs. A 2015 Caring.com survey found that only 56% of American parents have a will or living trust.
.No long-term strategy in place. When a family wants to sustain wealth for decades to come, heirs have to understand the how and why. All family members have to be on the same page, or at least read that page. If family communication about wealth tends to be more opaque than transparent, the mechanics and purpose of the strategy may never be adequately conveyed.
No decision-making process. In the typical high net worth family, financial decision-making is vertical and top-down. Parents or grandparents may make a decision in private, and it may be years before heirs learn about it or fully understand it. When heirs do become decision makers, it is usually upon the death of the elders.
Horizontal decision-making can help multiple generations understand and participate in the guidance of family wealth. Estate and succession planning professionals can help a family make these decisions with an awareness of different communication styles. In-depth conversations are essential; good estate planners recognize that silence does not necessarily mean agreement.
James E. Hughes, also wrote Family: The compact among generations where he states two important principles:
1-Long-term preservation of family wealth is a question of human behavior
2-The preservation of family wealth is a dynamic process of group activity, or governance, which must be successfully re energized in each success generation to overcome the ever-present threat of entropy.
And we end with some levity.
Families are like fudge – mostly sweet with a few nuts. Anonymous