How Will You Pass On the Family Business?
Few family enterprises survive long after founders pass them to younger generations. You can beat these odds with frank discussion of some of the most important – and often ignored – aspects of running a business.
A recent Wall Street Journal article, “Lost Inheritance,” hit home for me. The story tells of Tom Rogerson, whose great-grandfather grew rich as a banking titan. Subsequent generations, including Tom’s father, squandered the wealth through expensive hobbies and poor business decisions. The sad ending: a forced liquidation auction.
Today, Tom professionally helps families retain wealth. Those wanting to avoid the economic fate of the Rogersons are wise to listen to him.
My family’s experience is similar. In 1887, my great-great grandfather, George P. Huffman, founded a company that eventually became bicycle maker Huffy Corp. Nearly 80 years later, my grandfather, Horace M. Huffman Jr. (“Chief” to his grandkids), took the company public.
By the late 1970s, Huffy was the largest producer of bicycles in the U.S. and, the year I passed my driving test, named to the Fortune 500. Chief was motivated to build on the legacy entrusted to him, strengthening the community and sharing his love of cycling and fitness along the way.
I grew up understanding how this prosperous business provided us many wonderful opportunities: meeting Olympic cyclists and famous basketball players and sometimes traveling on the company’s private plane. To say my identity was tied up with the family business is an understatement.
But shifting economics, globalization and a failure to diversify washed away much of that identity (and a great deal of the wealth) in a relatively short time. The Huffman family remained majority shareholders until the early 2000s. By 2004, the company filed for bankruptcy.
This story is at the root of my passion for working with generations of families. And odds of winning the game of succession remain high.
According to the Family Business Institute, almost all (88%) of current family-business owners believe their relatives will control their business in five years. Yet only about 30% of family businesses survive into the second generation of owners and 12% into the third. A mere 3% of all family businesses operate into the fourth generation or beyond of ownership.
The most common reason: Subsequent generations are simply unprepared to serve as stewards of family fortune. By the third generation, business owners can become far removed from the original creator of the wealth creator and from his or her inspiration and values.
If the new generation doesn’t share the founder’s original ambition and feel a motivation to preserve the wealth, an endeavor with great meaning that took a long time to build no longer provides opportunities for future generations.
What would Chief think? What can families like yours do to avoid falling victim?
When passing along any inheritance, think in terms of opportunity creation for your heirs and successors. Too often families want to keep mention of wealth quiet around the children, fearing that full disclosure might spoil the kids and undercut motivation. The opposite holds true: Full transparency leads to greater education and to the kids’ ability to practice prudent financial management when the time comes.
The fundamental issue of wealth preservation is qualitative, not quantitative. Such preservation depends not just on accounting for all the wealth and analyzing the numbers, but also on articulating and understanding the values and motivations behind the wealth creation – and recognizing the opportunities the money provides. Further, families who stress that wealth is a privilege, not a right, also have a better chance to preserve it.
Hold family meetings to discuss the history of the wealth creation, the responsibilities that come with prosperity, the shared purpose for resources and the timing and expectations for inheriting wealth. These actions help your younger generations internalize the values of the founder and instill in that generation a sense of responsibility.
I am extremely grateful that Chief believed in such open dialogue. It was clear to all of us that wealth came with great responsibility – a motivation for each of us to seek success in our own chosen fields, ironically. Heartbreaking as Huffy’s bankruptcy was for my family, we learned how to create wealth and success across our generations.
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Written by Alexandra H. Ollinger, CFP, and a wealth advisor and principal at Truepoint Wealth Counsel in Cincinnati.
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