According to the Family Business Institute, 97% of family businesses do not survive past the third generation after creation. High profile examples are abundant. The Forbes family has reportedly been forced to sell off properties because of financial difficulties. The Busch family, founders of Anheuser-Busch, took four generations to build the company and just one for it to fall apart.
The failure to transfer the knowledge of how to create wealth and keep it are often the main reasons for the demise of family businesses by the third or fourth generation, rather than estate taxes and a perceived inability to transfer wealth. The generation that created the wealth is considered highly productive, but the subsequent generations do not learn those skills; they become accustomed to a lavish lifestyle and never learn about saving or spending wisely.
Succession Planning and Estate Planning for Family Businesses
Succession planning is as important in a family business as in a public corporation. According to the Family Business Institute, 97% of family businesses do not survive past the third generation. Succession planning and estate planning can help determine what to do if a family member who is next in line is performing poorly.
There are numerous high profile examples of failed family businesses. Perhaps the most glaring is the Busch family, founders of Anheuser-Busch. Adolphous Busch joined the struggling company in 1864, and through four generations it thrived, generating nearly $17 billion in revenue in 2008. But personal problems and failure to adapt to the market led to the company’s hostile takeover by Belgian-Brazilian conglomerate InBev.
With successful family businesses, the generation that created the wealth tends to be highly productive. The creator is frequently a larger-than-life type A personality who enjoys enormous control over the company and undertakes extreme effort for wealth creation, which can be detrimental to family relationships. The founder often does not share control or ideas about the company with his family while he is alive.
The next generation doesn’t learn about saving or wise spending, becoming accustomed to a lavish lifestyle. Subsequent generations lack the incentive to become strong, resourceful leaders and to strike out on their own to make more money. They develop a completely different ethic about spending than the previous generation. Since the founder put himself over his family, adversarial relationships develop between spouses and children, often leading to conflicts and alcohol and drug abuse.
The failure of wealth to survive to the third or fourth generation is usually not because of estate taxes or the inability to transfer the wealth, but because the knowledge of how to create wealth and then to keep it is not passed on. When the children are not integrally involved in the company before the founder’s death, they lack wisdom and experience. They also may feel they have something to prove once they take over, which can lead to reckless decision-making.
Children in the second and subsequent generations also may not be as intelligent or shrewd as the founder and find themselves taken advantage of. This is especially the case for children with a famous name. The name attracts hangers-on who do not have the children’s best interests at heart. Detailed estate planning using trusts can help mitigate this problem by not allowing the children unfettered access to inherited money.
Estate planning is also important because of the danger of drug and alcohol abuse. The World Health Organization states that the more money someone has, the more likely they are to abuse drugs and alcohol. Substance abuse is one of the most common reasons wealthy families see their fortunes squandered. Trusts can be used to help encourage entry into a recovery program or keep substance abusers away from the family fortune.
A successful family business created through dedication and hard work by one generation can be preserved through careful succession planning and estate planning by qualified professionals.