The most difficult challenge that family businesses face is transferring their wealth successfully from one generation to the next. It’s a problem faced by family businesses worldwide: only one family business in ten avoids ‘rags to rags in three generations’. The first generation works hard to accumulate wealth; the second holds on to it; and the third spends it all or loses it. Even the wealthiest family businesses aren’t immune – the great Medici banking family lost everything by the fourth generation.How do successful family businesses break the cycle of building up wealth, only to lose it?
According to Martin Jenkins, an expert in wealth transition, it’s important to focus on managing the human capital just as much as the financial capital. The family that prepares the next generation thoroughly will protect its business for the long term. They’ll need financial education, so they understand finance and how to manage it in the business. (It will help them to control and manage the family wealth sensibly, rather than being controlled by the wealth.) And they’ll need to be involved in reaching business decisions together with the founding generation, so they understand the pressures on the business and reinforce shared family values.
Accumulating wealth for the business (whether it’s property, equities or other types of financial asset) is different from preserving wealth for future generations. Some families deliberately separate the two strands. They set up a company that’s not part of the main business, to invest in assets such as property, and/or to build up a pension fund for older family members. Recent government research shows that this is a good way to protect and develop family wealth. It also spreads the risks, rather than relying on the trading company.
Whatever approach the family decides to take, they’ll need to have clear goals for their wealth that look ahead as much as a hundred years (that’s the timespan of three to four generations). And they’ll need to involve their heirs in the plans for preserving wealth. It’s a common mistake to concentrate on the legal aspects, such as setting up trust funds, without making sure the next generation understands what these arrangements will mean for them in practice.
Finally, real life is often messy, with divorce or mismanagement of funds by inexperienced younger generations. So the family must have asset protection strategies to deal with risk from its own family members.
To discuss this issue further, please contact Steven Scarlett
, Lovewell Blake's Family Business Partner.