“IN A family business, it’s the third generation that presents the big problems. The first generation founds the company and has the drive and the dedication to move it forward. The second generation rides that wave. The third generation wants to do their own thing. They’ve seen Broadway; they’ve had all the advantages.” Gale Petronis
There are many proverbs to describe the challenges faced by family businesses in building wealth and leaving a lasting legacy. The Chinese say “wealth never survives three generations,” while the Italians say “from the stables to the stars and back to the stables.” The languages may vary, but the sentiment is the same.
It’s been the same all over the world and through the ages: entrepreneurs start from nothing and build a business; their children maintain the business – and a wealthy lifestyle; their grandchildren grow up in affluence and lack the inclination to work and be responsible – and end up losing the business and the wealth.
Statistics show that today’s family businesses have a mean age of more than 60 years and are nearing their third generation of family leadership. That makes the concept of family businesses faltering after the second generation less relevant. As a matter of fact, in two previous articles we have discussed some businesses shattering old-school ideals such as that of Kongo Gumi, Japanese temple builder which lasted for 14 centuries (1,400 years) and succumbed only to closure due to unfavorable business climate in 2006. Then there’s the Mellerio dits Meller, a French jewellery house founded in 1613 and still active today.
“Each generation imagines itself to be more intelligent than the one that went before it, and wiser than the one that comes after it.” This classic quote by George Orwell can apply in family businesses as well as life.
Traditional family businesses typically focus on the single family unit versus the extended family, and on this generation and the next instead of on into the future.
What would happen if your family had a plan for the next four or five generations?
Wouldn’t it be nice if you think way beyond your generation?
I recently initiated one in Singapore and the family patriarch specifically requested that I help the family craft a family business plan spanning 30 years! Last year, a colleague based in Hong Kong requested me to collaborate with him in preparing a family business (trading) for 50 years!
There are specific tools and guidelines that family businesses can follow to help them succeed through the generations. According to family business expert John Davis, the ‘secret sauce’ of long-term business success can’t be captured in numbers but thru three main ingredients: growth, talent and unity.
There are specific tools and guidelines which family businesses can follow to help them succeed through the generations. A key concept suggests that focusing largely on building financial assets leads to losing financial wealth, while focusing on building “human assets” leads to keeping and growing financial wealth. Preserving wealth by focusing on family development refers to strengthening family functioning as a foundation for the preservation of family wealth.
A Chinese proverb states that one has to govern his family as you would cook a small fish – very gently. Focusing on “people assets” can help to preserve wealth like not spoiling children who are future successors of the business. Instead, teach them the value of money and encourage them to study hard and prepare themselves for future takeover.
To preserve a family business and financial wealth through generations, it may be advantageous to focus on growing the vitality of individual family members and the family as a whole. In this way, each succeeding generation can become another “first generation” – bringing creativity, dynamism, drive and maturity to the enterprise of being a family in business.
In order to stay alive commercially as a family, you must grow your assets faster than your family or business consumes them.
Returns on assets tend to wane over time as an industry matures and ultimately declines. To maintain high returns and keep your family company modern and competitive you need to make well-timed, significant bets in growth businesses. Some of these bets can regenerate your core business, but others might diversify your business activities, moving away from your original business. If you can’t consider diversification and entrepreneurial efforts, you are probably not going to survive the long-term.
Successful total wealth management planning requires an integrated approach not only to managing a family’s investments, but also to determining how financial structures and holdings compliment other key aspects of wealth maintenance and succession such as tax and estate planning, insurance and even philanthropy. The wealth planning process should include clear, consistent communications to ensure alignment with long-term family goals and a strategic view of future risks and opportunities.
To reiterate what I mentioned in one of columns last year…When a business owner dies or becomes permanently disabled, the business itself may die or be permanently disabled on the same day – not because something wrong was done – but because nothing was done!