October 5, 2021
Key things to know:
Whether disruption to the family business is due to internal or external forces, lessons learned by the first generation can still be passed on.
Starting a family foundation or funding business endeavors for the rising generation can help family members carry on the entrepreneurial spirit.
Long-established family businesses may have a track record of success, but that doesn’t mean they can rest on their laurels. Disruptions happen unexpectedly, whether they’re due to shifts within the industry or changing dynamics within the family or business itself.
Kelly Thomson, a regional managing director for Ascent Private Capital Management of U.S. Bank, says he sees family businesses experiencing two types of disruption. The first is internal. “Many times, their children might not be interested in being in the business that the mom or dad started,” he says. “They may have a succession issue. Or sometimes you have family members that don’t get along and they want to break up the business into different pieces.”
“If you have an amazingly successful entrepreneur in the family, having that person share some of the wit and wisdom they’ve developed over the years can really help the family develop and continue the entrepreneurial spirit.”
- Jim Linnett, Ascent Private Capital Management
The second type, external disruption, happens when an industry shift affects the family business. “In these situations, the family may have to sell all or part of their business,” Thomson says. “They then have to go through a planning process where they learn to maintain a similar income from an investment portfolio, versus income from the family business.”
Whichever type of disruption is at the root of selling the family business, it doesn’t have to mean the end of the family’s entrepreneurial spirit. The valuable lessons learned by the first generation can still be passed on. Not only can the younger generation appreciate the hard work that went into launching the family business, they can apply what was learned over the years to their own entrepreneurial endeavors.
Jim Linnett, a managing director of client advisory for Ascent, worked with a family that sold its business. Prior to selling, the family set up a structure to share information and hold meetings with one another. “When the business was gone, it felt like a loss for the family in terms of developing knowledge and continuing to be sharp on their business acumen,” Linnett says. “They saw the value of working with Ascent to schedule periodic family meetings that went deeper into talking about marketable securities and investments. They developed a family structure around their wealth that mimicked operating a business.”
In addition to managing wealth, some families decide to pass on their legacy by starting a family foundation. The upcoming generation can become stewards of the assets, which the foundation uses to benefit the family’s mission or interests. “This is another key to a successful multigenerational wealth transfer: connecting the next generation through philanthropy,” Linnett says. “Philanthropy allows the children to build the same skills needed to run a business.”
Another option after a family business is sold, and those assets become liquid, is providing capital to younger members of the family to fund their own entrepreneurial pursuits.
“Some clients give the liquidity to the next generation to invest in or launch a startup, and others loan it to them,” Linnett says. “Other times, the assets are held in a trust where the beneficiary can borrow from it. The family acts like a bank for itself by providing liquidity to the next generation to be entrepreneurial, but at the same time there are protections around the wealth.”
If members of the next generation aren’t ready or simply don’t want to enter the world of business, some families may choose to fund outside entrepreneurship via a trust similar to a family foundation.
“One of my favorite examples of this is Benjamin Franklin,” says Linnett. “If you look at the second codicil to his will, he creates a trust for the benefit of tradespeople to provide money for apprenticeships and get the tools they need. I see some families putting together a fund for people who want to apply, and the money can facilitate entrepreneurship. It’s a great way for wealthy families to enable entrepreneurship.”
The further generations are removed from the founder of the family business, the greater the chance that invaluable entrepreneurial insight will be lost. Leveraging the expertise of a historian can help document the journey of a family business and ensure its legacy remains. That way, a family can pass on its legacy to future generations who might not know them well.
“If you have an amazingly successful entrepreneur in the family, having that person share some of the wit and wisdom they’ve developed over the years can really help the family develop and continue the entrepreneurial spirit,” Linnett says. “It doesn’t have to be a chronological documentation. It can be the lessons they learned along the way. Sharing the mistakes and challenges they overcame can be quite powerful.”
New family business success stories often start after disruption. When families continue their entrepreneurial legacy, it can help build and continue the special bond between parents, grandparents and children. With some planning, the end of one generation’s family business legacy can be the beginning of the next.
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