Why legacy matters
Recognizing and honoring balance between family and business is not new to Galliard and the Family Business Advisor network. Undeniably, the vision of a family bound together by its values and traditions, and thriving in tandem with a growing business is appealing. Preserving family as the business grows and changes, however, goes beyond warmth and gets right to the heart of success. To learn more we caught up with Family Business Advisor, Michael O’Neal, to understand why legacy matters.
We asked O’Neal why legacy is such an important issue, particularly in relation to business transition. He responded:
The significance of legacy for the family business resides in the disturbing statistics for family enterprise longevity. We are familiar with the alarming failure rates for transition from first to second (33% success rate) and then second to third generation (17% success rate) family business. To look at legacy, then, it is important to look not just at longevity of the family business but that of the business family. Properly understood, legacy is a living concept that helps to both manifest and modify behavior. Specific to family-owned businesses, legacy is about family stories and more importantly what we learn from them that can be adopted and adapted.
Counter to the historical focus on wealth transfer, professionals are expanding their transition attention beyond mere documentation of how money is moved. In fact, O’Neal suggests that a myopic financial approach that pays attention only to financial wealth generation and preservation often leads to family members assuming that transition is about financial wealth only. Rather, family wealth is a composite of human, intellectual, social and financial capital.
When the focus is money alone, heirs will begin to equate their self worth with their net worth. They are unable to gain from the high-and-low experiences of their predecessors and often unable to weather the highs-and-lows they may face in their own futures. This inability to adapt is reflected in the fact that 91% of wealth transfers fail by the time the assets reach the grandchildren.
If a family and its business are to beat the often repeated “shirtsleeve to shirtsleeve” cycle; capturing and purposefully drawing on legacy might be as critical as understanding balance sheets and process improvement. A growing body of research affirms that survival of family businesses from one generation to the next is grounded in how purposefully the family remembers and learns from its past and how well the business is prepared to perform in the future. In fact, many would suggest the ability of the family to retain its foundational values, specifically intending to preserve legacy, may be a key contributor to long term success for both family and business.
We recognize that our conversations are part of a greater opportunity, and the transfer of information from one generation to the next.
A family enterprise that has purposefully captured its legacy has likely addressed what the 2012 Allianz American Legacy Study referred to as the ‘four pillars’ of legacy planning. Those include meaningful and rich conversations about:
- values and life lessons [via family stories]
- fulfilling final wishes and instructions
- personal possessions of emotional value
- financial assets and real estate
These pillars are further aided by the installation of best practices that have been found successful for sustaining family enterprises. These best practices, occurring in successful multi-generational family businesses, were recently summarized by researcher Dr. Dennis Jaffe. In his 2012 Family Office Exchange/Family Business Network paper, Jaffe suggests it is the balance of these three best practice “pathways” that enables sustainability over time.
Pathway I: Nurture the Family includes:
- regular family gatherings
- sharing and respect for family history and legacy
- shared perspectives on community service
- openness in communication
Pathway II: Steward the Family Enterprises includes:
- a strategic plan for family and business future
- greater transparency about business and financial decisions
- explicit agreements about family assets
- exit and distribution policies
Pathway III: Cultivate Human Capital for the Next Generation results in:
- employment policies for family members
- agreement of values about money and wealth
- development of next generation leaders
- encouragement for all to seek purpose in life
When the family engages in the meaningful conversations that capture their history – both the highs and the lows – they are far more likely to successfully manage the generational transfer of both the family and the business. Succeeding generations will be informed of what was and what remains important. That connection may well be the single-most important ingredient in being able to keep the family healthy and the business sustainable.
So, how might we begin a journey to capture our legacy? For starters, by recognizing that our conversations are part of a greater opportunity, and the transfer of information from one generation to the next. We might look for ways to broach conversations that are gentle and non-threatening. We might write down what we know today about our family lineage, history, culture. Legacy is thinking about what you are leaving. Create a family mission statement, or ask family members to write a vision for what they would like people to say about the family 100 years from now. A variety of relevant exercises, governance and policy structures are readily available. Most importantly, just begin!