Navigating Inter-Generational Wealth Transitions When You Run a Family Business
Guidance for Overcoming Common Challenges
Having something to pass down to future generations of your family is a dream shared by many people, especially those with family businesses. If you’re lucky enough to achieve it, however, you may face some of the common challenges of an inter-generational wealth transition. So challenging is such a transfer, in fact, that 90% of affluent families have greatly diminished wealth by the third generation. Below, we will discuss three common wealth transfer issues and provide guidance to help you navigate these potential challenges and ensure your assets move smoothly to the next generation.
1. Generational Divide
A major cause of wealth erosion is related to the relationship between members of different generations. The older generation often does not trust the next generation in line with money management or running a family business. This lack of faith can contribute to the problem, however. It becomes a self-fulfilling prophecy when the younger generation is left out of important financial or business decisions.
Consider that the younger generation is a resource for fluency in the evolving technological landscape. Failing to include them in conversations about the business’ future can be detrimental to your financial and business interests. Over the last several decades, the financial and business landscapes have changed rapidly. Developing technology has altered the way we approach sales, customer interaction, and marketing. You will want the next generation’s perspective on flexibility and adaptation to the market and customer demands.
To bring all generations of the business onto the same page financially, make sure the younger generation is integrated into the business early on. Much like retirement investments, the sooner you can get them involved, the better. These four tips for integrating a new generation into the business will help you get started:
Work on Trust
One of the issues with a smooth transition is a lack of trust. This lack can be the result of poor communication and understanding. Consider including the next generation in the business as early as fifteen or sixteen years of age, even if just as an observer at family meetings that discuss the finances or management of assets. This kind of early exposure can go a long way, and it serves as an opportunity for the next generation to understand the family’s financial values priorities, giving them a living memory of the decision process.
Build a Foundation through Experience
Allow the next generation to begin learning the ins and outs of business operations. While observing and sitting in on conversations has merit, sometimes there is simply no substitute for learning by doing. In fact, this is a great way to integrate them into all aspects of the day-to-day operations of the business, and it will also allow them to develop the soft skills only acquired through experience. These early steps can be as simple as interning in different departments or moving into managing small projects for which they are solely responsible.
Be a Mentor
With responsibility, of course, comes the possibility of errors and mistakes. Mentoring helps address these errors and mistakes and provides another chance to teach through advice and example. In this way, poor or careless decisions can become springboards for growth.
Mentorship also allows you to understand a younger family member’s decision-making process, the areas in which they excel, and where they need improvement. At the same time, it teaches them to take cues from you to complement their own style.
Don’t Forget to Listen
Even though you are in a superior position and you know your business inside and out, keep communication open both ways and listen to suggestions from the next generation. An example of this is the rising interest among younger generations in sustainability and accountability. In this example, the younger generation will have a greater buy-in when contributing to a socially equitable and environmentally conscious workplace.
Also, keep in mind that the younger generation will represent the next generation of customers you are looking to attract. There is a good chance that what appeals to them will appeal to the next generation of customers, too, which is an inter-generational win-win. Listening with open ears will also increase the next generation’s buy-in and interest. For you, it may broaden your mindset and provide new opportunities to expand or improve your business.
2. Business Structure
For a business to remain stable and sustainable through an inter-generational transition, there must be a solid foundation. Thinking of the long term and how to maintain a business that has staying power is difficult. One pillar of sustainability, however, is strong governance within the company.
Well delineated jobs and a high retention level of employees are both indicators of strong governance. Knowing what each person does, having a contingency plan for employment gaps or vacancies, and knowing where a skill set will fit best go a long way. Knowing how each role functions creates an integral boundary. It becomes clear how the business will operate, ensuring family members and non-family employees will move forward without a hiccup during the transition.
3. Growing Family Wealth
There is no getting around it; one reason retaining wealth and maintaining a sustainable wealth transition is so hard has to do with the broadening family tree. Each generation expands, becoming larger than the last and eventually diluting the wealth over time. Not having a grasp of the tax laws and estate taxes can further strain the wealth transition. Maximizing your wealth transition and assets needs to be carefully planned.
Additionally, an inter-generational wealth transition that is sudden can result in an inexperienced family member in charge of the assets. This may lead to poor investments that either extends the wealth too far in a risky situation or has such small gains that it cannot compete with inflation.
Here are a few tips that can help manage the family assets for their full benefit:
- Wills — Have wills in place that address the estate tax and allow a smooth transition of assets to the correct parties.
- Trusts — Objective management of a trust is an absolute must. A neutral voice in arbitration can ensure the wealth transition is handled without emotion and runs smoothly.
- Family Mission — You can think of this as a mission statement for the family. Having a known set of principles and values for money management is a key part of transparency. Being on the same page with investments, donations, and redistribution will streamline the focus and expectations.
- Professional Guidance — Financial experts can assist with the above three tips. A financial expert can be instrumental in creating a wealth management strategy that will ensure sustainability through multiple inter-generational wealth transitions.
Concluding Thoughts on Navigating Inter-Generational Wealth Transitions
Investing in the next generation is investing in all the generations to come, yet it can be challenging when there is a family business involved. An inter-generational wealth transition can be rocky, but it doesn’t have to be. The guidance above is meant to facilitate greater communication and understanding that will ensure the business you start today will continue with the family tomorrow.
Paces Ferry Wealth Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”). This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.