Coleman Greig Principal, Paul Lucas, is an experienced adviser to family businesses and also holds an internationally-recognised certificate in Family Business Advising from the Family First Institute, a global organisation for advisers to family businesses. In this article, he discusses the importance of preparing the next generation to take over the reins of a family business.
All too often, the skills and values that created wealth in the first place don't flow through to subsequent generations. So how can you help your children to become better stewards of the family legacy, so that they hand it over in a better condition than when they received it?
How does entitlement arise?
While some children see their legacy as something they can develop for the generation after them, others tend to view it as an 'entitlement'.
When there's a focus on entitlement, attitudes to money become more consumer-like in nature: 'I have this wealth and I'm going to use it for my own needs'. A sense of entitlement seriously increases the risk of conflict amongst family members as others become concerned that one might receive more than they deserve.
Most of us don't intend for our children to think like this, but certain environments cultivate a culture that gives rise to these attitudes. The child who receives almost everything he wants is more likely to have an attitude of entitlement: 'It is there when I ask, and that should be the way it continues'.
In my role at Coleman Greig, I have observed many parents that find it difficult to talk to their children about wealth and wealth management. How much wealth do we have? How much do we need? Where did it come from? What do we plan to do with it? This is particularly evident in the baby boomer first generation entrepreneur.
Issues of entitlement
When one of the children has the feeling of 'this is mine', 'the legacy is nothing more than I am entitled to', then the conflicts are difficult to avoid.
I have seen siblings spend millions of dollars in legal battles fighting over legacies which, in many cases, did not justify the expenditure. In one such conflict, one brother took his own life before the case could even be heard.
An alternative is to foster and encourage the concept of stewardship, where the beneficiaries think in terms of how they can manage the family wealth for the benefit of all family members and for subsequent generations. 'What is in this for me?' becomes 'what is in this for us?'
This is now evident in the use of the family office, a structure that is becoming better known amongst families with wealth. In these families, the wealth is pooled for the benefit of all and, often with a goal of improving wealth for subsequent generations.
Shifting the mindset
The culture of stewardship requires a different approach. How do you move a family from entitlement towards stewardship? Culture is learned early in the life of a child from the behaviours of the parents. Once the culture is established, it is difficult to change. Where the child sees parents who work hard, do not talk about the problems and successes of the business, the child may be left with the impression that the building of wealth is the value of greatest importance. When they receive everything they ask for, they have the impression that it will always be there.
Parents can set their own goals as to the values they wish for their families, and then work towards those behaviours which result in a culture around those desired values. It is better to start early in this endeavour. When the goals are not set or the plan did not achieve the desired goal, then the changing of values and the culture is more difficult and requires more time.
One way to bring about a change of culture or mindset is to set projects for children that develop their financial values and shift them into a mindset of stewardship. One entrepreneur I know has a 'one on one' meeting over a lunch with each of his grandchildren shortly after their 18th birthday. In that meeting he tells them that he intends to give them a sum of money. He then asks them to set some goals for the investment of that sum, how they might go about investing that sum, what advice they might obtain, and how they will monitor the outcomes. He then requires them, as a condition of the gift, to report back in 12 months time. Here he is teaching them goal setting, budgeting, how to seek advice, planning, implementing plans and monitoring success. Importantly, he also requires accountability - all very good skills for young people who may inherit wealth.
If you have a family business, a project that often works well is to ask your child to research and put together a history of the business and then have it professionally printed. Researching where it started, how much was borrowed, the downtimes and the risks taken, will give the child an understanding of where the wealth came from. It will also give them a greater appreciation of what had to be done to get the family to where they are today.
And so, you start to shift their thinking to 'this is our family inheritance, not my inheritance.'
Within the business there may also be some cost management projects they can get involved in to give them a more strategic view of running a company.
Skills for life
Usually, a new generation coming into the business will need help from parents, members of the family and employees to achieve these projects. Learning to compromise, building trust and working in teams are great values for them to learn.
It is just as important to develop their financial skills too. The goal is to give them the knowledge to manage their wealth, rather than hand them the assets. Just as the parent used his or her entrepreneurial skills, so the child might also be given the opportunity to develop a business or grow an existing business.
Fortunately, there are lots of ways they can learn these skills. They could join an investment club, or go on the ASX website and practice share trading so they understand what drives the share price on various companies.
You could also get your children involved in community projects. If you're running a fundraising event, take them along and get them to help out. Even get them to do a budget for the event and learn how you have to spend money in order to get money.
It helps when parents give children encouragement with these projects as well as a certain amount of freedom to get on with the job.
If they go down a track with which you do not totally agree, or is costly; making mistakes can sometimes offer the best learning experiences. Seeing a young person develop these values and life skills, and really start to understand the place of wealth in their lives, is so rewarding.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.