Intergenerational wealth transfer involves a raft of personal family issues, and in our initial engagement with a family, we often find that the family is not communicating regularly on matters relating to improving, preserving and protecting the family’s wealth. There is, in effect, a ‘no go zone' where issues like wealth and ownership cannot even be raised. This leads invariably to different people having expectations and a different sense of entitlement, which in turn leads to fixed positions, jealousies, and potential conflict. This ‘no go zone’ is alive and kicking even in the largest and wealthiest families. Many of these families have regular social events and get-togethers, but that’s not the same as sitting down to discuss the hard issues.
But it’s not easy for families to start the process: it takes courage to take this step. But doing so will ensure family harmony and continuity, make it easier to protect relationships, facilitate succession planning, and work together more effectively. It’s a challenge to find the successful family formula, but it can be an even bigger challenge to preserve the family wealth.
There’s an old cliché that families make money in the first generation, enjoy it in the second, and lose it in the third. But there’s a good reason why that’s become a cliché: all too often it’s true. There are all sorts of reasons why this happens – from over-leveraging to accelerate growth, to over-spending on personal lifestyles, to matrimonial disputes, to putting ‘all the eggs in one basket’.
Many family firms invest for the long term as they are not dominated by short-termism, unlike many public companies. But even where family firms diversify their balance sheet, they don’t diversify where they invest their wealth, which leaves them with a disproportionate exposure to one single asset.
There will always be forces outside your control that even the best planning won’t protect you from, be it a change in government regulation, obsolescence, technological development, market and product disruption, or sovereign and political risk. That’s why every fund manager will say you need to spread your risk, but too many family firms don’t apply this basic principle to the money they have in their own firm. Some of this is for emotional reasons – owners are understandably attached to the business they’ve built. If they weren’t, they wouldn’t have been a success in the first place. But it’s important to strip out the emotion when it comes to a wealth preservation strategy. So consider the ways in which you may be able to release funds for the benefit of the family, such as a partial sale, recapitalisation or bank loans.
Many family firms take the view that they will get higher returns from their own business than any fund manager could give them, especially after tax and fees are taken into account. And this can often be true. But diversification is just as important, to ensure long term and stable returns, and we often find owners shifting to this point of view as they near retirement and start considering the income they need to fund the lifestyle they want. That’s a good time to look at all the options, in the context of effective succession planning, and to achieve a successful transfer of wealth between the generations.