Full version of article featured in Autumn 2017 Capital Finance Magazine.
When considering who is to blame for the ‘shirtsleeves to shirtsleeves in three generations’ phenomena, which sees family businesses lose their fortunes as the enterprise is passed down, it seems logical to assume the buck stops with the third generation.
If they were at the helm when the ship crashed into the rocks, who else can be responsible?
But as Simon Bloom explores in his book Passing the Buck: How to avoid the third generation wealth trap, there are so many more factors involved in a family business’s downfall.
However it is important to consider the experience of the third generation or G3 individual. Only by understanding their motivations and challenges can we work towards reducing the estimated 88% of businesses that fail at the G3 stage.
From birth G3 individuals are privileged; they are born in the best hospitals, live in the largest houses, attend famous schools, travel on exotic holidays and drive – or are driven – in luxury cars.
Experiencing such trappings from such an early age might appear glamorous but for the G3 individual it is simply normal. There is nothing remarkable about being driven to Eton in a Bentley if your parents and grandparents are multi-millionaires.
The issue here is if a G3 individual fails to appreciate their privileged status they are likely to develop a sense of entitlement.
If they do not understand that most people are not driven to public school in a Bentley their outlook on life is skewed. They can start to believe they deserve such a lifestyle despite having done nothing to earn it.
As we explored in an earlier article generation one individuals are highly driven and motivated. They often have difficult life experiences that push them to succeed. Second generation individuals, having seen their parents work hard to achieve so much, are driven to preserve that wealth and protect it from erosion.
Many of the third generation meanwhile are what Bloom describes as ‘demotivated and directionless without a natural sense of purpose’.
Bloom argues that often G3’s lack the innate desire to achieve something themselves since they already have everything that a regular job could give them from a financial point of view.
This lack of ambition coupled with a sense of entitlement is a very dangerous combination.
If an individual struggles to find their place in life and they are not bound by the usual constraints of money or work, they will often become bored and frustrated. These toxic emotions combined with an endless supply of money can lead to substance abuse, which is used to fill the void.
The potential lack of motivation and ambition experienced by G3 may be made worse through their parents and grandparents indulgence. Often G1s, who may have experienced tougher times before achieving success with their business, have a desire to give their children and grandchildren everything they never had.
For G2 parents who are witnessing an aimless child, the temptation is there to offer them a secure place in the business which may not only been a bad strategy for the firm, but it provides even less incentive for the G3 to venture out on their own.
The realities of joining the world of work for the first time may also be demotivating for a G3 individual. If they have been afforded an allowance which outstrips any salary they can hope to be paid for an entry level job. And so attention returns to the family firm where the G3 individual may find a place without having to work too hard to get it.
In future articles we will look in more detail about how to avoid this toxic trap for G3 individuals. However it is worth noting here that not all G3s are entitled and aimless.
There are many who have been very successful in their own right and while they might not have chosen to continue the family business, they have contributed meaningfully to society.
These individuals will likely have been taught the importance of hard work and perhaps not been granted everything their hearts desired.
They may also, from a young age, have been shown the huge disparities of wealth across the world and come to appreciate their own fortunate position.
Their parents may not have offered a place in the business as a security blanket nor was it used to shackle the individual to the family, preventing them from pursuing their own goals.
Essentially G3 individuals need space and support to develop their own sense of self and importantly worth. Self-esteem is critical to building meaning in life.
G3s may be the final pair of hands on the wheel when the business crashed but they had not been driving the vehicle for the entire journey. G1 and G2s need to take responsibility for the offspring they create, and ensure the G3s are ready willing and able to take over running the business.
In conclusion giving vast amounts of money to ones children without at the same time giving them a work ethic and emotional intelligence often leads to G3’s having a lack of self esteem and empty and meaningless lives which leads directly to them spending far too much and not making appropriate and skilful business decisions to keep the family fortune a float.