How to Best Communicate Lessons Learned to the Next Generation
Preparing the next generation to successfully manage the assets or business they’ll inherit takes work and communication by both the parents and children.
The older generation has been successful in accumulating a high net worth through years of being frugal, planning extensively and only making small mistakes. Unfortunately, even though the parents have been successful in their career, only 30% will be successful in passing on their assets to their children. And only 15% of those children will pass on the family’s accumulated assets to their own children, leaving the assets intact for another generation.1
In this article, I’ll share some important ideas for families who own a successful family business they’ll be passing along. Then in our final article in this series, we’ll cover ideas for families who have a high level of diverse family assets. In both of these family situations, it’s very important the families pass on their values and experience in addition to their valuables. This sharing of knowledge is where most families fail by just passing along the assets without also passing along the hard-earned knowledge to manage and preserve those assets.
The Importance of Communication
As previously covered in a related article, the three most common reasons a family fails to sustain their accumulated assets are:
• Errors in financial or tax decisions (5%)
• Unprepared heirs (25%)
• A lack of communication and trust within the family (60%)
As the statistics reveal, communication is vital for every family in order to maintain and preserve the assets that have been accumulated by prior generations. This communication is especially important now, because over the next two decades the greatest transfer of wealth in history will happen — more than $80 trillion will pass to the next generation.2
How to Pass on a Successful Family Business
Succession planning and exit decisions for a closely held family business probably require the most communication. Exposing the children to all the benefits of a closely held family business starting at age 10 or so is usually a good idea. Children need to learn how to work hard, and within the family business is a good place to start. That on-the-job training should continue through high school and college, at which point it’s important for the children to work for another company in your industry — or perhaps a company in a completely different industry — for several years before joining the family business. Unfortunately, some parents don’t make their children work hard because they want them to have a better life than they did, but this is the wrong training for taking over a closely held family business.
During this training period, the younger generation needs to study their parents and learn what they’ve done over the past 30 to 40 years to preserve and grow the family business. Success in the past holds clues for the future, and these clues are what the younger generation needs to be looking for. I’ll talk more about education in the business world in my next article.
The blueprint for passing on a successful family-held business looks different for every family. Some children may have voting stock and others may have non-voting stock. Some children may come to work for the company and some may choose a different career. Protecting and preserving hard-earned assets over many generations isn’t easy with constantly changing tax laws, business competition and a changing economy.
Most business owners can talk for hours about their company, their products and their great employees. Unfortunately, many of those individuals have a hard time expressing their feelings with their sons and daughters about them taking over the company in the near future. The company is often the glue that holds families together, but current owners need to think about training their children for future leadership just like they would train one of their young managers for future promotion.
Owners running closely held family businesses today should adopt a new position and title within the business as part of the succession planning process. They’ve been president for many years, which means that they’ve been on the football field every day as a quarterback, calling the plays. Their new position and title moving forward should now be coach. If their business is going to continue for several more generations, they need to stand on the sideline and start coaching the new quarterback. They need to let them get knocked down a few times but make sure they don’t lose the game. They need to coach their handpicked quarterback on how to win plays with customers, vendors, suppliers, employees and everyone else who comes into contact with the company.
Because preserving the assets your family has accumulated — sometimes over multiple generations — is usually very complicated, young adults need to learn how to work with the family’s financial advisors, attorneys and accountants. Families that have accumulated a high net worth always have a team of advisors working with them to make adjustments every year to keep up with a changing economy, new tax laws and changing business decisions. Children in their 20s and 30s need to be trained how to work with trusts, different types of corporations, buy-sell agreements between stockholders, employment agreements with key personnel and even pre-nuptial agreements. Having these complicated documents in place is just part of being in the family.
Parents need to communicate with their children and tell them the stories over and over of how they were able to accumulate the assets they have. Those young adults need to sit in on some of the conversations every year about changing financial ideas and the decisions being made. As mentioned before, the next generation is going to be receiving trillions of dollars over the next two decades, and many don’t have the training to maintain those family assets or run the closely held family business successfully enough to pass it on to the next generation.
Business owners should communicate with their children about different business and financial topics every year as their children are getting older and going through high school and college. Starting to educate them with the skills they’ll need to manage assets and family capital will be invaluable to their success.
Creative Planning specializes in helping families and business owners with valuations, succession planning, estate and income tax analysis and retirement income projections. For more information, schedule a call with a member of our team.