BUSINESS NEWS - History has proven that family businesses and their wealth preservation can be tricky. Why many family fortunes disappear over less than three generations, is commonly rooted in differences between family members, including:
- purpose, values and beliefs
- investment mindset (often changes from “growth” to “preservation” objective in later generations)
- human and intellectual capital
- lifestyles (once frugal, often becomes lavish)
Some families manage to deal with inter-generational transition successfully, with astonishing long-term wealth results.
Every successful family business has its own fascinating story, but there are some universal truths that we can perhaps learn from, and apply to our own personal wealth, or retirement planning strategy.
There are some key considerations for those who are interested in building inter-generational wealth, based on the insights of James E Hughes Junior in Family Wealth.
Embracing the team dynamic
We are deceiving ourselves if we believe that each individual family member’s finances can be kept independent from each other. Parents’ and grandparents’ financial planning is often derailed when children/siblings fail to launch, get retrenched, divorce or fall ill.
Similarly, parents must frequently support grandparents financially who have not sufficiently provided for their old age.
Below are some points on how families can approach shared family business affairs and resources despite their unique/individual differences.
Practice a positive mission statement
State that you will spend more time thinking about your own purpose, values and beliefs. Record these, communicate and align them to the wider family who will make up part of your financial succession plan.
The pursuit of happiness of each valuable family member within the framework of a joint family purpose, seems key to the sustainability and progress of family wealth. It is important to consider how individual decisions will cumulatively impact the wider family purpose and individual members within the family.
Inter-generational planning takes practice too
Naturally very few business models start off with inter-generational thinking. It is, however, important to try and identify, at an early stage (when a business is expanding rapidly), that it has the potential to transform into a family fortune.
Getting this right can equate to enormous benefits for future generations.
When it comes to financial planning, many investors consider long-term to be eight years or longer. Inter-generational financial planning requires a different approach; short-term planning for the first generation, medium-term planning for the second generation, and long-term planning for three generations will be for 100 years, or longer.
This puts our fixation on short-term results into perspective and begs the question whether our focus with wealth planning is placed correctly? Every investor is different, and the unique needs of each investor should be considered appropriately.
Design a framework for decisions
A system of family governance and decision-making must be designed to deal with disputes, even in the absence of the founder. The nature and effectiveness of this family governance system will play a significant role protecting and passing on your family wealth onto future generations.
All decisions should be considered against the family’s purpose and values.
Start early to involve your family members in financial decisions they should be aware of. Any benefits to fellow family members should rest on commercial terms (e.g. only interest-bearing loans are repayable, and market-related remuneration decisions are taken by the well-designed governance system).
The greatest challenge
All business/wealth operations face the challenge of successful transition of power and decision-making that will ensure continued growth of wealth for future generations. One approach that can help is identifying a line of successors early enough and letting them “get on with it” (within the succession framework created).
If your wealth is going to outlast you, test this framework while you are still around, so you can refine the family governance framework.
Professional advice
Not everyone contributes the same way to a family structure. Every family member adds something unique in respect of financial, intellectual or human capital, so be sure to play to everyone’s strengths and invest in a sustainable financial future for all.
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