How to Avoid Going from Shirtsleeves to Shirtsleeves in Three Generations

Math and education – these are the explanation and the solution to the shirtsleeves-to-shirtsleeves family business problem. Three generations is far too soon for a family to go from being shirtsleeve workers to successful business owners and then back to shirtsleeves. But there are ways you can make sure it doesn’t happen to your family.

It’s a math problem

If we look at the numerator and denominator effect, we can see that very often, the numerator (the amount of wealth created by owning a private business) does not increase fast enough to keep pace with the denominator (the number of family members who are either direct owners of the business or who acquire their wealth from the business). But this does not have to be a mathematical fact. Businesses don’t have to collapse in just three generations. It should take much longer than that for the business to become unable to sustain the wealth requirements of the family as it grows and the wealth divides.

So why does it happen so fast? The root of the problem lies in the fact that too few families are having the right conversations. Too few are doing enough to prevent the shirtsleeves-to-shirtsleeves problem. Many observers look to the idea of entitlement as one reason for a business not being able to continue its growth pattern. Some family members may simply believe the business will always be there and they don’t need to do anything to ensure that its growth keeps pace with the family’s growth.

Unfortunately, the fastest-growing segment of litigation is estate litigation, and estate battles arise because of that lack of important conversations. As you can imagine, litigating a business owner’s estate will not help the family business continue to be profitable and grow into subsequent generations. So what do we do to help business owners think ahead and protect their families and their wealth?

Education is the solution

That brings us to education. At DFS Private Wealth, we believe in financial and business education not just for the business owner but for the entire family. We think it’s important to help the next generation understand what they can do with the wealth they have accrued from the family business and to ensure the values of the first generation are passed on to the second and the third. Helping a business owner transition the family firm on their own terms means educating multiple generations. The first generation needs to have confidence in the second and needs to see a future for themselves in some capacity, whether that’s in the business or not. Helping clients to communicate is the number one way to help family members become educated on the same topics, which puts them all on the same page.

An independent advisor is your best teacher

So where do business families get this all-important education? Their best bet is an independent financial and business advisor. DFS Private Wealth understands private business ownership because we own a multi-generational family business too. We understand, in a way bank-based advisors simply can’t, how to build a private business through succession. We have personal experience with how life changes can cause a business to be lost. This first-hand knowledge is one of the reasons DFS is passionate about helping other business owners and their families.

Build a plan into the business

Business succession is not something business owners think about often. But they should. If an owner passes away and their spouse has not been involved in the business, are provisions in place for the business to endure and continue to provide for the family? DFS Private Wealth has the expertise to overcome that obstacle by helping owners build plans for business succession into the business. We help you look at all the options – in advance – so that you and your family can decide which approach will work best for your family and your business. Sometimes it’s best to sell the business when the founders want to move on. In some cases a good approach is to bring in managers who can keep the business going while they train and educate the next generation until they are ready to step into leadership roles.

Whatever the plan is, the key is to get professional advice, look at all the possibilities for business succession, and get everything in place – before you need it. Talk to the family business experts at DFS Private Wealth today about how they can work with you to create a plan that will take your family’s success well beyond three generations.

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