The 3 Generation Trope

It’s a most quoted statistic – “just 13% of family businesses survive the third generation” – and it has finally been challenged. It comes from a single study of US manufacturing companies in the 1980s, and for some reason it has stuck and become almost axiomatic.

But it is deeply flawed. Most importantly, it never compared family businesses to non-family businesses (family businesses on average do last longer), and it also never considered the reasons why those businesses did not continue. Besides, not all businesses are meant to last that long – among other things it’s a function of their industry and their ability to do regular strategic renewal (and for some family business, the latter is a huge challenge).

The other issue is the conflation of this trope with the well-known “shirtsleeves to shirtsleeves” proverb. Enduring family business is not the same as enduring family wealth. Plenty of families have been able to parlay an operating business (which is usually how the wealth was created) into a healthy mix of diversified assets that can support the family for decades.

So forget blanket generalisations about family businesses and focus on their unique attributes that are a mix of strengths and weaknesses.

And view the proverb as a statement about the culture of wealth and how it affects those who created it, those born into it, and those well removed from its creation.

Consider This: How do attitudes to wealth in your family differ between generations? How long do you think your business (or any business) ought to last?

Further reading: https://hbr.org/2021/07/do-most-family-businesses-really-fail-by-the-third-generationhttps://www.thinkadvisor.com/2021/05/25/what-wealth-really-means-to-4-different-generations/https://www.forbes.com/sites/dennisjaffe/2021/04/28/how-family-business-leaders-make-room-for-new-generations-the-right-time-and-the-right-way/?sh=45833f283933https://www.kiplinger.com/retirement/estate-planning/601798/how-to-help-your-family-wealth-last-for-generationshttps://thriveglobal.com/stories/what-successful-family-businesses-do-to-survive-beyond-the-three-generation-curse/https://www.advisor.ca/tax/estate-planning/four-reasons-intergenerational-wealth-is-destroyed-in-3-generations/

Actionable Generational Wealth Succession 

For more in-depth, thought-provoking discussion points and further commentary on family and business conflict resolution, access my Familosophy newsletter archives by signing into our newsletter https://DavidWerdiger.com. We will send you the archive links from there.

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Family business social capital

A ‘family business’ is more than just a business owned and operated by a family. In addition to being a vehicle of wealth creation and entrepreneurship for the family, these businesses can bring other non-financial benefits – known as “socioemotional wealth” or “social capital” – to family members.

Being part of the family enterprises brings feelings of pride, personal reward and satisfaction, and can constitute a part of family members’ identity.
These additional intangibles are very important when it comes to succession planning, from bringing in new family members to handing over the reins at the appropriate time.

It’s worth noting that this additional emotional bond between family members and the business can be a double-edged sword: it can also drive poor decision-making and conflict. The key is to be aware of these additional non-financial dimensions in a family business, and to manage them proactively.

Consider This: Do you talk about your family business? I don’t mean “business talk” – I’m talking about how family members feel about the business, what it does, its history, and importantly its future.

Original articles: https://www.forbes.com/sites/robclarfeld/2019/03/19/family-businesses-social-capital-is-key-to-successful-succession-planning/#5a97d8b05713, https://www.crainsdetroit.com/special-report/beyond-profits-family-businesses-can-create-socioemotional-wealth

Reprinted with permission.

Actionable Generational Wealth Succession

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Harmony; Family vs Business

Can you have the best of both worlds? Family businesses have to tread a fine line: they must compete like any business, while also maintaining harmony amongst the family – both those who are involved in the family business and those who are not. There are a few common themes that help families maintain this balance:

1. Trust is essential, and what builds trust are good communication and transparency. Anywhere information is not provided, people make up answers to their questions instead, which can lead to the spread of incorrect information, and the erosion of trust. A good governance structure can help avoid this and preempt the potential loss of trust.

2. Disagreements and disputes within businesses always arise, and in family businesses, they can spill over into personal and family life. Families need to learn how to “disagree well” – to raise issues about the business and about the family in a structured way rather than ad hoc over the dinner table, and to agree on how disputes will be resolved – that usually translates to internal processes.

3. Because family members have multiple roles, setting boundaries is especially important. This means boundaries between work life and home life, and treating family space as ‘sacred’. Short breaks from work to indulge fully in family time can be very healthy. The issue of roles becomes especially important as family members transition from doing many different things within the business to bringing in professionals/externals – this is a time to narrow and define their roles within the family enterprise.

Consider This: If it was “family vs business” in your family, which one wins? How often do you mix family & business? Do you have agreed processes for tabling issues and resolving them?

Original articles: https://brandequity.economictimes.indiatimes.com/news/business-of-brands/top-biz-family-mantra-company-first-kin-second/67682903, https://www.smartcompany.com.au/partner-content/articles/family-feud-how-to-stop-family-business-disputes-from-following-you-home/, https://www.valuewalk.com/2019/01/successful-balance-between-business-and-family/

Actionable Generational Wealth Succession

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3rd Party Family Business Advisors

While the family business may be delivering good returns, how much is it actually worth? Often, family members are disappointed that the market value does not reflect a large enough multiple, because they are unable to look at the business as an outsider (and potential buyer) would.

The first article has some classic ‘value drivers’ expressed in terms of growth and risk reduction. What I think this is missing from this model is the most important question a family business should ask: what is the business worth with family members vs what it is worth without them? If your business is overly dependent on family talent, then it lacks intrinsic value that can be realised in the market.

On that note, the second article discusses the process of bringing in outsiders into the family business. Whether in management or on the board (or advisory board), outsiders can add significant value because of their perspective, and also their ability to mediate conflict and help ensure all family members voices are heard. In order to be effective, the family must be prepared to listen and learn.

Consider This: Have you considered the value of your family business without family members? Are the business accounts run at arms length so they can reflect the true value of the business? Are external advisers viewed with disdain or for the value their experience and diversity can bring?

Original articles: https://www.bakertilly.com/insights/thinking-about-selling-how-to-grow-the-value-of-a-family-owned-business/, https://www.forbes.com/sites/nextavenue/2019/01/29/hiring-an-outside-expert-for-your-family-business/#7b2749bc61ed

Actionable Generational Wealth Succession

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When NextGen Have No Interest in Taking Over

A common challenge for family businesses is when the rising generation have no interest in taking over. This can be especially common in sectors like manufacturing or farming which may be considered an attractive or exciting career path for younger family members to join.

There are two concerns for the family members currently in control: (a) who will look after the business? (b) who will look after the customers? Both of these are important, because family businesses don’t just want their wealth creation vehicle to continue, they also want to perpetuate their own unique relationship with their customers, which is often far deeper than ‘transactional’ and are an expression of the family’s values.

Two of the articles below tell stories of family businesses facing this very challenge. The third one asks some hard questions: do family businesses need to be perpetuated for their own sake? Is their purpose purely economic or also social? These are good questions for any family to ask itself (with at least 2 generations part of the discussion).

Consider This: If your children don’t want to take over the family business, what will become of it? What is your legacy, aside from the business?

Original articles: https://www.chicagotribune.com/business/ct-biz-manufacturing-succession-planning-20190103-story.html, https://www.biztimes.com/2019/industries/human-resources-management/what-happens-when-theres-no-one-to-take-over-the-family-business/, https://www.businesstoday.in/opinion/columns/hera-are-some-guidelines-for-perpetuity-in-family-business/story/306242.html

Actionable Generational Wealth Succession

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The Most Valuable Thing to Your Children

As a wealthy family, what is the most valuable thing you can give your children? One sure way to find out the answer is to ask (too often parents don’t bother).
According to a Wells-Fargo survey of Millennials, more than 90% of children say they want to inherit their parents’ values, not their wealth. Some 84% want top sustain and build on their family’s legacy. This should be very heartening news for parents.

In a previous newsletter, I mentioned the relative importance of education and networks which families can provide to their children. Clearly, it’s not all about money!

Regarding philanthropy, 80% of children surveyed say the family’s giving aligns with their own values, but 40% want more of a say.

The survey shows the importance of talking about wealth and legacy within a family, and how learning between generations can go both directions.

Consider This: Have you asked your children what the family wealth means to them? What is most important to them about their lives? Conversations like that aren’t always easy. It’s important to make ‘space’ for them where all voices can be heard.

Original article: https://www.businesswire.com/news/home/20190109005028/en/Children-Millionaires-Inherit-Parents%E2%80%99-Values-Wealth-Wells

Actionable Generational Wealth Succession

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Our COVID Statistics are all Wrong

Management guru Peter Drucker gave us “what gets measured gets managed” (for better or worse). Governments bombard us daily with COVID-related statistics, but many of them are measuring the wrong things.

The most common statistic is “new cases per day”, but that has serious deficiencies. Firstly, it’s quoted as an absolute number, rather than as a proportion of the population. So in the early days of COVID, the US had huge daily numbers, but as a country of some 330 million, its absolute numbers dwarfed those of France and Germany, leading us to think it was much worse. At the time, their case rate per 100,000 population was actually lower than many countries in Europe. If anything, a better comparison would be between the US and the EU (450 million). Secondly, the new cases were never split out by severity: asymptomatic, mild, severe, and deadly. We only had the number of cases and the death count. That split is especially relevant now, as populations are being vaccinated, opening up, and new cases spiking rapidly with the Delta variant. While the case numbers are high, the proportion of severe and deadly cases are what we should be worried about. But is anyone tracking that? Are they tracking the proportion of each type of case, which can provide data over time to show an improved ability to treat cases. Thirdly, in Australia, the only good number of new cases per day is zero. That means our elimination strategy is either successful or it is not, with no room for nuance (and that’s quite aside from the unwanted side effects of that strategy).

The most important thing to measure is the R number – how contagious the virus is. In simple terms, it’s the average number of people anyone with COVID will infect (some people will infect no-one; others will be super-spreaders – the average is what is important). If R is more than 1, then COVID spreads and the number of cases keeps increasing; if R is less than 1, it fizzes (like the common cold or the seasonal flu). When COVID first came out, R was 2.5 which made it quite contagious, and at the time we didn’t know how to treat it, and were concerned about the capacity of the health system. The current Delta variant has an estimated R of between 3.5 and 4, and this is now poses significant additional challenges around the world. It seems to spread faster, and may also be more severe on average.

How to reduce R? If immunised, you are less likely both to get it and also to transmit it. Social distancing, mask wearing and hand sanitising also reduces the spread. COVID also spreads less outdoors, and in warmer temperatures. The common sense approach would be to

  • set a goal of reducing R to below 1,
  • develop strategies to achieve that,
  • identify the metrics that show you are on track, and
  • report them regularly.

In Australia, R is not being reported regularly (in some other countries, it is). Authorities may be tracking it, but if they are, they are not keeping us informed. Instead, we get a litany of fear-ridden statistics like number of exposure sites, and the number of people in isolation because they visited an exposure site. This comes straight from the How to Lie With Statistics playbook! We can’t directly manage or impact those numbers, so what’s the point of reporting them and using them as a measure of success? I’d like to think the government has clear targets that determine when they choose certain measures, and when those measures can be removed. If they are, they are not sharing them with the public!

Only recently, additional information was added to “new cases per day”: how many of those are linked to an existing outbreak, and what proportion were infectious while in the community. While that extra information is helpful, it has taken five lockdowns for the government to start telling us, and we are still in the dark as to the metrics of success and how to get there.

We have a similar problem with vaccination rates. Our government’s huge bet on the AZ vaccine has backfired badly. This is another case of bad measurement, irresponsible reporting, and poor social marketing. The risk of the clotting side effect is less then miniscule, and yet a single death amongst millions vaccinated makes front page news. This has led to mass reluctance to vaccinate, and policy on the fly regarding vaccination priorities and eligibility. If we want to reduce R, surely we should prioritise the vaccination for people who come into contact with many people from across the city (e.g. retail, transport) as they have the greater risk of spreading the virus across a large geographic area. We rushed to vaccinate the most vulnerable, but with a zero-COVID strategy, how does that help?

Here are some of the things we don’t report: number of deaths per year from the seasonal flu (about 1,000), number of severe side effects from medications taken regularly by the masses (a lot more than you think), number of deaths in hospitals from incorrect dosing (ditto). We must be careful not to stray here into the logic flaw of whataboutism which can lead to distractions. Rather, the numbers that we do choose to report need a healthy dose of context and nuance to avoid the kind of mass fear we are now experiencing.

I’ve been following the patterns of graphs here since the start of the pandemic. The spikes in new cases per day in well-immunised populations (like Israel and UK) are not such a concern – instead, we should look at “case fatality rate” which has dropped significantly in those places, and remained roughly steady in non-immunised populations. Singapore have recently had a shift in policy to start treating COVID (assuming enough people are immunised) like the flu, and focus on “medical outcomes” rather than pure case numbers (note: they are still applying suppression measures as well). We don’t count cases of mild flu, so don’t count cases of mild COVID.

The only way out of this mess is mass vaccination that turns COVID into just another flu. When countries all start doing that, measures like new cases per day will be meaningless. At all times, we need to be measuring the right things to deliver the outcomes we are seeking, and communicating clearly to the population.

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Charitable Givers of The Next Generation

Philanthropy can be a great way to engage different generations in a wealthy family, and for family members to find purpose where there is no imperative for paid employment. It’s worth keeping in mind the intergenerational differences and trends in giving so that the family giving experience can be as positive as possible.

The Blackbaud Institute’s report on the next generation of American giving has some useful insights. Giving priorities differ by generations, but health, religion and local social services are still high priorities. Gen X and Gen Z are disproportionately committed to animal-related causes.

Older donors consider monetary gifts are their greatest form of impact, while younger donors value the importance of volunteering time and advocacy, and have embraced peer-to-peer fundraising such as through running and cycling events.

There are a number of mindsets that drive giving (responsibility, financial stewardship, planning, spontaneity, activism and recognition), and these carry different importance with different generations. That in turn will drive their choices for whom to support and how to support them.

The full report has plenty of charts and is an easy read, and I recommend it for anyone who is active in the philanthropic world.

Consider This: Who makes philanthropic decisions on behalf of your family? Are these communicated to the family? Have you considered the ways philanthropy can be used to drive closer connections between the generations and convey the family legacy?
Original article: https://institute.blackbaud.com/asset/the-next-generation-of-american-giving-2018/

Actionable Generational Wealth Succession

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Weighing in on Family Business Conflict of Interest

The essential problem family businesses must deal with is conflict of interest, which arises when people have multiple roles – in the business, as an owner, and as a family member – that can potentially conflict. Thinking about the issues of a family business in this way is a good path to mitigating the challenges they can bring.

Establishing explicit rules is a good start, and this article covers several good ones: only put family members on the payroll if they have an active role in the business, communicate clearly and honestly with employees, separate family decisions and business decisions, and create boundaries between family and business each with their own decision-making process (and group).

This is something I cover in the mini-course “Culture of Acceptance”

Consider This: Does your family have explicit rules regarding how the family business operates and is governed? How do family members view the family business (or family operating assets)? Think back to a recent issue within the family and consider whether or not it relates to a conflict of interest between the multiple roles that family members occupied.

Original article: https://www.inc.com/guides/201102/7-rules-of-conduct-for-family-businesses.html

Actionable Generational Wealth Succession

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The future is female

Research has shown that in HNW families, daughters were rarely encouraged nor received support to pursue entrepreneurship education. Entrepreneurial families often prepare their daughters and sons differently for their careers. Cultural factors and their associated gender biases may result in the problem being far more pronounced.

Things are changing. Some 82 per cent of women from wealthy families expect to inherit substantial wealth over the next 20 years, but 41 per cent of women are currently not involved in family financial decision making. They need to start preparing themselves. The role of women within wealthy families is also shifting, in part due to the rising generation having a less traditional outlook on life. Family businesses are able to play a critical role in helping break glass ceilings that perpetuate gender roles.

There are changes in the wind on the investment and advisor spaces too. Millennials and women value investment principles that have a positive impact on challenging issues. HNW women are often less confident about making family financial decisions, prompting the need for investment relationship dynamics to change. To remain competitive, advisors must consider a truly consultative approach; female advisors are well-suited for the job. Women – more of whom will control significant wealth over the next 10 years – prefer to work with female advisors.

Consider This: Does your family treat male & female children differently? Are they given the same choices & opportunities within the family enterprise? Are there cultural or historical gender biases in your family? Is this a source of intergenerational conflict?

Original articles: https://www.eurekalert.org/pub_releases/2021-06/uoo-gbi060721.phphttps://www.greenqueen.com.hk/women-prefer-to-work-with-female-advisors-now-is-the-moment-for-esg-customisation/https://www.forbesindia.com/article/bharatiya-vidya-bhavan039s-spjimr/addressing-the-novel-fault-lines-in-family-business/67115/1https://www.jdsupra.com/legalnews/cracking-the-glass-ceiling-empowering-6627462/https://www.campdenfb.com/article/how-raise-your-succession-game-next-gens-family-businesshttps://www.bnamericas.com/en/news/almost-25-of-family-businesses-have-a-female-presence-on-their-boardshttps://www.wealthadviser.co/2020/12/15/293551/growing-financial-power-next-generation-wealthy-women-prompting-change-within

Actionable Generational Wealth Succession 

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