Avoiding the traps of wealth transition

First published on Family Business United

Pressure to pass the family business to the next generation and pressure to accept the role creates succession challenges on both sides of the transaction. Managing expectations is key to ensuring the business can pass successfully to most deserving candidate.

Our deepest fear is not that we are inadequate, our deepest fear is that we are powerful beyond measure.’

Wrongly attributed to Nelson Mandela this powerful quotation is from author Marianne Williamson’s book A Return to Love. She continues: ‘Who am I to be brilliant, gorgeous, talented, fabulous? Actually, who are you not to be?

Williamson reminds individuals to celebrate their successes and to be proud of their achievements. Only in recognising our own abilities and applying them to something of value can we attain real happiness and meaning in our life.

As explored previously, unless individuals believe they have achieved something of real value, they can lack self-esteem which in turn prevents them from truly being happy.

This is a particularly important consideration for the founders of successful family businesses as they consider wealth transfer – beyond simple share ownership – to the next generation.

Willing and able

Passing the business down the family line may not only seem obvious, it is for many first generation owners highly desirable. Having their own children take control of running the business may ensure the first generation has left a lasting legacy.

But assuming the second generation wants ownership of the business maybe an expression of their own needs.

The second generation will have encountered an entirely different set of life experiences. They will have an alternate set of values and potentially an entirely different mode of being, to that of their parents.

Their motivations, ambitions and goals are also unlikely to mirror their parents since their upbringing will have be within a successful family business rather than formed by the creation of it.

In short, the second generation may not want to take on the business or even work in it.

Alternatively, for the reasons we have discussed, they may not be capable of taking over the reins. The first generation is by definition entrepreneurial, self-starting and driven by a desire to better themselves.

The second generation meanwhile will more likely have a sense of lacking, having experienced the great things their parent has achieved but feel they could not repeat such a feat. Their own interests may not match that of their parents and as such their skillsets may be unsuited to that of CEO.

Attempting to force an unwilling and incapable family member into taking over the business can see it run into the ground.

In his book Passing the Buck: How to Avoid the Third Generation Wealth Gap, Simon Bloom explores the problems associated with wealth transfer to family members.

He recognises that for the second generation to make a real success of the family business they have to be equipped with the right skillset and motivation to take on the role.

The second generation’s neurological development will have been shaped not by a belief in their own abilities but in that of their parents. He notes that second generation individuals often feel inadequate; that they cannot measure up to the success of their parents. Essentially, they do not believe they are worthy of replacing their parent as head of the family business.

Bloom writes: ‘If we understand that neurologically the reward pathways of the second, first and third generations will in their natural state have very little in common due to the very different formative experiences of the three generations, it is no wonder that there is often a lack of common understanding and a lack of a sense of how to be of help.

Setting expectations

If the first generation wants to move towards common understanding, they must carry out an honest – and early – assessment of generation two’s capabilities.

Expectations need to be clear from the outset; what does the parent want from the child? Do they really believe their child has inherited the necessary characteristics to become a successful business person? Have they spent time building up the requisite skills?

These assessments need to be made long before succession is a real possibility.

In return the child must be honest and open with the parent about their own wants and desires. Do they want to step into their parent’s shoes? Will taking on the business give them self- satisfaction and met their aspirations? Are they willing to take on the role or do they merely feel obligated?

Generations one and two will have to have difficult conversations if they are to reach meaningful conclusions to these questions. They will have to communicate truthfully and openly about familial and business relationships, and understand the differences between the two domains.

Both generations need to recognise their strengths, their weaknesses and the different parts they play around the board and the dinner table.

A deserving appointment

Ultimately both parent and child needs to ask: would the job be awarded if the application was with a competing firm?

If the answer is yes and generation two has the skills, aptitude and desire then there is every reason why a succession transition of wealth should be completed.

If there is doubt, on either side, succession may need to be reconsidered.

The greatest gift the first generation can bestow upon the second is not control of the family business but the freedom to pursue their own happiness. Only then can their children recognise their own self-worth and make their life a genuine success.

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