You’re the founding member of family wealth now what do you do?
By Melvin J. Howard
You have worked day and night you have made sacrifices to no end. Blood sweat and tears was on the daily menu. You have taken ridicule sometimes by immediate family members. You have taken risks that people said were foolish. You were laugh at left isolated it cost you a marriage or two, friends were nowhere to be found. You had a number of set backs. But you did not quit you kept going and now you are a success a Founding Entrepreneur of a family empire now what do you do how do you make sure it is carried on? Only 34% of family businesses survive to the second generation, and just 15% make it to the third. Among those that don’t survive, 10% are due to transfer taxation, 25% to unprepared heirs, and 60% to the way successor family members interact.
When discussing generational issues, one needs to distinguish the entrepreneur-founder of a family business from the senior family member in a business that is now in the hands of the second or third generation. Entrepreneurs differ from other people. They have certain characteristics, which make them successful. As it happens, these are the very same characteristics, which make them difficult to relate to as individuals. Spouses, girl-boy friends of Entrepreneurs have to deal with a whole new set of dynamics that are not part of a regular relationship.
A family business' founding entrepreneur is usually a
father. (Although less true today than in the past, the entrepreneur-founder
is, more often than not, male.) The founder probably had problems with his own
father over authority and control. As a result, he has not had the role model
needed for shaping his interaction with his own children in ways that build a
healthy relationship towards authority and control issues on their part. It
would be a mistake, however, to confuse the entrepreneur's difficulty interacting
with his children with a lack of commitment to family or a lack of intellectual
understanding of the father's role.
On the contrary, an entrepreneur is frequently driven to achieve precisely because of a deeply rooted need to recreate the family situation that he wished he had experienced as a child, but was denied. In fact, entrepreneurial founders can often be persuaded of the need for communication between generations because they understand intellectually the emotional needs they experienced in their relationships to their own fathers.
Entrepreneurial seniors can often find the wisdom to change even before being pushed by their children seeking more autonomy and responsibility, who seek, in short, a benign exercise of authority by their parents. Ensuring financial security for children is also seen as an important motivation for amassing and protecting wealth. The desire to pass wealth to the next generation is sometimes tempered by concerns that leaving too much money could cause problems for the benefactors. Increasingly, wealthy individuals are keen to ensure that their dependents receive financial education to prepare them for wealth and, in some cases, are adding stipulations to their wills, such as the requirement that a university or some other form of education is to be completed.
Inheriting money can have a “curse,” a dark side—it
can disable people, isolating them, causing shame about what they have,
arrogance, or a sense of unworthiness. The discovery of personal identity in
heirs has been likened to a journey, where they must go out in the world and
find out who they are on their own, away from family and their names. The major
challenge in development of heirs is to balance a sense of responsibility for
their wealth with their sense of entitlement.
If an heir feels that they deserve what they get and
that there are no corresponding values or responsibilities placed upon their
inheritance, they eventually experience a deep sense of emptiness, even
resentment, inside. Getting a paycheck on one’s own, starting a small business
or a community project, or just graduating with honors, are achievements that
build personal identity. The young heir has to find some way to do something
important.
It all begins with an entrepreneur
The entrepreneur, the original founder and manager of
what will become a Family Business Empire, controls all levers of power on the
levels of ownership, management and family standing behind this newly created
business entity. He/she provides the founding myth for the family that captures
the core family values and a vision to be referred to across generations. The
family business will play a significant role in the dynamics of a family for
generations to come. The business is in fact part of the day-to-day living of
the family, and is a platform for interactions within the family and with
outsiders.
In the later generations, not everyone in the family
is, or wants to be, involved directly in the running of the business – while
they might all be owners, only some are managers. Whether rising family members
become managers in the business is in great measure determined to the extent
that active efforts were made to consistently involve them in the business from
an early age. Further, the greater generational distance from the original
founder translates into a rising need for a separation of power and control
over the family’s financial affairs, including the family business. While the
business is a family enterprise, at the individual level, once you get past the
founder, not everyone in the family is or wants to be involved directly as
manager in the business. In such situations there is a clear need to think
strategically about the family’s financial position and design a new structure
and a plan of action – they have now become a family-in-business.
Maintaining and Growing Private Wealth
A family-in-business needs a platform to capture the
wealth – business and financial and to address the broader needs of current and
future generations. A family office is the perfect structure it will take care
of the day-to-day management and administration of the collective assets and
business affairs of one or more families. Its long-term goal is to preserve and
grow the wealth for current and future generations. For the family-in-business
a family office takes on the rallying role previously served by the family
itself.
Transfer assets across generations
Family offices have served as vehicles for
intra-family and intergenerational transfer of assets. The most common example
for the establishment of an office is the retirement of the original
founder(s). Family offices can be established on behalf of heirs, so as to have
the structures necessary to manage inherited assets in common, rather than
liquidating the assets and dividing the proceeds. The truth is that many
persons are unprepared to deal with accumulated wealth or a sudden financial
windfall. The process of accumulating wealth and enjoying its benefits consumes
substantial time. Little thought is given to what happens in the event of
disability or death of senior family members. Even less thought is given to the
education and preparation of children for the responsibilities of wealth that
awaits them in the due course of time. Much work must be done to protect and
preserve wealth. This includes a continuous process of education for senior
family members, middle-aged adults and younger family members. When formulating
a strategy for wealth preservation, rich parents should consider:
Mommy
Financial planning for the family is pointless unless
absolute financial security is assured for Mom. It is not possible to talk
about sharing present and future wealth with children and other family members
until priority and attention is given to providing financial security for the
surviving spouse. Usually, this is the wife. Sometimes, this wife is not the
mother of some or all of the children who are expectant heirs of a portion of
the family wealth. Stepmothers, stepfathers, and stepchildren complicate the
discussion of wealth planning alternatives. But it can be overcame with the
right strategies. Depending on what kind of relationship you have with your ex-spouse
they can be included into the overall plan or left out of it’s entirely up to
you. If the founding member of the family enterprise have children but is not
married to the mother. This will have to be addressed if the founding member
remarries and has children with the current spouse this also makes it
complicated. Make sure you address all these issues with your estate
lawyer. Its just a common fact kids are not the same even in the same family.
They have different personalities some will take an active role in the family
business some will not. It is expected that almost half of all
family-owned businesses will undergo an event associated with successorship in
the next Ten years. In some cases, there are unfair biases and assumptions that
impede a healthy planning process. This can be overcome through candid
communications facilitated by a neutral professional.
The next generation.
Rich parents are reluctant to transfer wealth to their
children for fear much will be lost in a divorce. A prudent desire to
protect assets from loss or dissipation in the event of a future divorce is
commendable. At the same time, appropriate planning, including outright gifts
and trusts, should not be avoided out of unsubstantiated fears and concerns for
the future in this regard. There will always be excuses to avoid the
distribution of assets to members of the younger generation. At the same time,
there is a need to prepare the next generation for the responsibilities of
wealth. In many cases, there may be substantial wealth that should be shared
with younger family members before they are required to survive both parents.
What good will wealth do the children if they are 70 before they obtain it?
After all, rich widows live forever!
Many wealthy families allow one dysfunctional child to
stymie the planning process for the entire family. It is a rare case where all
members of the family are stable, healthy, mature, well-adjusted and free of
disabilities and shortcomings. In a typical situation involving three or four
adult married children, it is unusual if all of the marriages enjoy complete
harmony and happiness. It is important for the wealthy family to avoid allowing
one isolated situation to shut down the overall planning process that benefits
all members of the family. Appropriate special provisions can be made to
address the special needs of a family member. The circumstances, however,
should not become an excuse to avoid or postpone discussion of important
planning matters.
In-laws
Do not allow family traditions and gatherings to
prevent children from developing a healthy degree of independence with their
own families. At the same time, it is important for rich parents to remember
that their grandchildren share more than one heritage. They need to avoid making the mistake of
planning the lives of children. Rich parents should also allow their
children to develop traditions that are new and unique for their own family
units. Whatever route you take is purely up to you but not taking any advance
preparation for the future of generations to come is like planting a flower and
not watering it and making sure enough sunlight gets to it. Expecting that if
it is not looked after it will just grow on its own.
