A new paradigm of wealth planning is emerging for families, particularly those who own businesses, dramatically shifting the way a family understands and plans its wealth.
Family businesses play a dominant role in our economy, representing anywhere from 80 to 90 percent of U.S. businesses and one-third of Fortune 500 companies. It is estimated that more than 60 percent of the U.S. gross domestic product comes from family businesses, and family businesses employ more than 60 percent of U.S. employees. Further, research has consistently and repeatedly shown that family firms are more successful than those owned by outside investors. Understanding and planning carefully with these unique enterprises is crucial to the success of the entire U.S. economy.
The classic approach to estate and succession planning for family businesses is to treat the family issues and the business issues as separate and distinct. In other words, what works for the business would never work for the family, and vice versa. Thus, who takes over the family business would have little to do with the trusts established to hold the family’s wealth, including, oftentimes, the ownership interests in the family business. However, this approach is being challenged as incomplete and uncoordinated.
Over the last decade, a new understanding has emerged, applying basic systems theory to families and the businesses they own. It is now recognized that there are three separate and distinct systems in these families: the family, the business and the ownership. In a non-family business, it is generally easy to distinguish between business management and the owners, but for family businesses, these systems overlap and interact in unique and often valuable ways. Finding the right balance among these systems is crucial and typically requires a multi-disciplinary approach, using advisers who consider this type of work to be a calling.
Families who have begun to work with the unique and interacting systems in and around their businesses also have begun to recognize that true and lasting wealth requires a new understanding of wealth. Building financial capital is, of course, a key to long-term success of any enterprise, including family businesses. However, families also need to consider their human and intellectual capital to truly sustain long-term wealth.
Human capital is relatively straightforward – a family must keep its kids safe and healthy. Intellectual capital is more dynamic in any given family, but generally involves traditional education, knowledge about the family business’ unique industry, and a sharing of knowledge among family members. To drive and maintain these three types of capital, a family must develop its own set of values that drive each category. For example, are education and charity important to the family? If so, successful families write this down and internalize these core values in all that they do.
The process of identifying these shared values, proactively managing the family’s capital and successfully navigating the interlocking systems in a family business requires families to do some hard work. This process can be invigorating and rewarding, but it is also challenging for many families to take the time and energy to ensure that it is done. Successful families find a way.
Sverre Roang is an attorney at Whyte Hirschboeck Dudek S.C.
