How to protect the generational wealth of your family business

When you start your own business, you may not always consider how your actions will impact future generations. But there are ways to ensure your organisation creates – and sustains – long-term wealth that will benefit your grandchildren.

We have a look at how the initial vision of your business impacts its generational wealth, and how relationships and individuals play the biggest role in family fortunes.

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The business vision – entrepreneur, or starting a family business?

Some family fortunes lose their value because they are split up among many siblings and become diluted over generations.

According to Kevin Howell, who runs a family business consultancy, one of the worst things a family can do is to split up the family wealth.

“The reason this happens is that the founding members start out as entrepreneurs, and never come to the realisation that they are building a family business,” says Howell.

He explains that entrepreneurial- and family businesses are two very different organisations. Family businesses are much more complex environments that need specialised structures to establish boundaries between ownership, business management, and family.

“Because of this potential oversight by the founding generation, the family business is inevitably set up for failure. Besides governance structures, a family business also requires a very specific philosophy in dealing with wealth,” says Howell.

“The philosophy should be grounded in the stewardship of wealth rather than ownership. The entire family needs to realise that their responsibility is to steward the wealth to the next generation and not to grab ownership of the previous generation’s hard-earned assets,” he explains.

Howell points out that these two foundational elements are not easy to achieve – but they are very doable.

“As with all behavioural changes, the process requires the services of an objective specialist who can help plan, counsel, and coach the family to a blueprint for success for building generational wealth,” says Howell.

READ MORE: Sceptical about financial advisers? Here’s how to find one you can trust

Family principles control generational wealth 

Howell says that the default reaction for planning wealth distribution is to involve the family accountant or lawyer. These providers facilitate the creation of tax-efficient legal structures that aim to help the family manage the complexity of wealth transfer.

“This approach is flawed in the sense that it assumes that only money is involved, and that relationships can be managed from the grave with proper legal structures,” says Howell.

He believes that human relationships, coupled with the complexity of business, need a far deeper understanding than the accounting and legalities of wealth transfer.

“There are people involved, from different generations, with different views and values, with different visions and dreams. This is the root of the challenge. To start talking about wealth distribution and transfer, you have to start with the people first – the relationships and the individuals.”

He adds that, unless you deeply understand the individuals in each family, you are bound to run into difficulties once the founding generation passes away.

“Founders cannot plan to control their family from the grave. They need to leave a legacy, culture, value system, and vision for the future that everyone wants to be part of,” says Howell.

“This allows every family member the freedom to be part of something that benefits all and has space for every individual – whether blood family or not. The goal is to achieve unity of thought and this is only possible when a family starts with why the family exists, not why the business exists,” he explains.

Howell insists that, once you find that, you have found a reason for generations to want to be part of something other than just benefitting from the wealth of the previous generation.

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