Family business succession and wealth sustainability

There is a familiar narrative that when it comes to preserving family fortunes, more often, the story is of riches to rags. According to a study by the Williams Group Wealth Consultancy, 70 per cent of wealthy families lose their fortune by the second generation, and 90 per cent by the third. Perhaps, the most famous example is one of the wealthiest men of his time, Cornelius Vanderbilt who built a fortune in the 1800s, which, if it were adjusted for inflation today, would be worth over $200 billion.

His offspring lived so lavishly yet doing so little to preserve the fortune that by the 1970s when the family held a reunion with 120 members attending, there wasn’t a millionaire among them.

In his book, The Tide of Fortune, Manubhai Madhvani called this “the law of business gravity,” and went on to say that when the founder is alive, differences are avoided and priorities set, but once the founder dies, the business is transformed instantly from sole entrepreneurship into a partnership of equals, irrespective of ability or experience. 

And as each of the partners’ families grows, the stresses and strains increase on the partnership. Some are more risk-taking, some work harder; some are talented and hardworking but are not team players. Emotions, expectations, and perspectives become haphazardly interwoven, and with spouses and children added into the tapestry, the entire fabric becomes vulnerable.

He concludes that the permutations are endless, but the bottom line is that it will inevitably result in the division of the family’s assets. Their family went through it. Manubhai was, until his death the managing director of Uganda’s largest conglomerate, The Madhvani Group. 

Inherited wealth can destroy entrepreneurial drive and ambition. When affluence comes too easily, the work ethic can be compromised. The personalities required to succeed are difficult to learn when wealth relieves their need. Therefore however intelligent they may be, they can fail to develop the fire-in-the-belly to build on the foundation given to them.

This is coupled with the lack of full perspective of the hard work, delayed gratification, discipline, etc that the founder endured in accumulating the wealth. Further, heirs don’t fully understand the sophistication of, and therefore are unable to identify, recruit and retain great professional management, without which the business is weakened. 

Families need to take time to shape their members’ attitudes towards wealth and teach each new generation, early on, the difference between ownership (right of possession) and stewardship (the fiduciary role of holding the institution in ‘trust for’ the next generation). Warren Buffett’s famous take on inheritance is to leave his children “enough money so that they feel they can do anything, but not so much that they can do nothing” i.e. passing on the opportunity, but not readily consumable wealth. 

For effective family business succession, there is need for harmonious relations within the family, clear criteria for selection of the family members that are to lead the business, transparency for those not directly involved, an ownership structure that provides sufficient room for growth while allowing the family to control key parts, strong governance, and a dynamic business portfolio, professional management, and charitable foundations to promote family values across generations. 

Mr Allan Atwiine is a lawyer and business revenue growth consultant. [email protected]