Family businesses play a significant role in South Africa’s economy, with many prominent enterprises leading various industries.
However, key statistics indicate that only 30% of family businesses survive to the second generation while 12% make it to the third generation.
Why do they fail?
Unfortunately, studies indicate that around 60% of family businesses do not have a documented succession plan in place. Many family businesses also collapse due to a poor economic climate or lack of proper management. Often founders struggle to let go or fail to train the next generation. Sometimes family heirs are kept in the dark around the final wishes of the founder and may be unprepared or uninterested in taking over when the moment arise. Leadership transitions can create conflict, leading to uncertainty on direction.
Avoiding wealth loss from one generation to the next
As financial planners, we can play a pivotal role in preventing generational wealth failure. It starts with having the right conversations well in advance. Here are some basic tools that can be helpful in family planning:
1. Build solid relationships
Develop a clear succession plan early and involve the next generation.
Make it work for all generations. Considering the average age of financial planners in South Africa, most would probably be very comfortable in dealing with the Baby Boomers (born 1946-1964) and Generation X (Born 1965-1980). However, quite often one of the biggest challenges is establishing and deepening relationships with the Millennials (Born 1981-1996) and Generation Z (Born 1997-2012).
Ensure you understand trends and values across generations when you communicate. Digital communication is key. Different generations expect tailored experiences.
2. Create clear structures
Create a family constitution to define leadership rules.
Balance family involvement and professional management. Nepotism often leads to unqualified family members taking leadership roles.
Set up governance structures. Leadership transitions can create conflicts, leading to uncertainty around direction and business decline. Disputes over control, inheritance, and strategic direction are common. Without a clear governance structure, decision-making becomes chaotic.
Have structures in place to avoid mixing family and business finances. Some family members will treat the business as a personal bank account and a lack of financial discipline could erode the company’s capital over time.
Encourage the next generation to foster entrepreneurial thinking and innovation to stay competitive and be stewards of wealth rather than consuming it.
3. Surround yourself with experts in cross-border regulations
Families can be located across different countries, and assets dilute as they are split across generations subject to regulations in different jurisdictions. Involve legal specialists when creating a financial plan for ownership transfer. Use trusts, estate planning and tax-efficient investment strategies.
Benefits of a successful transition of wealth
The key to a smooth transition of wealth is ensuring that the next generation is capable of managing it to ensure that the family business and wealth remain intact. This could avoid unnecessary legal battles and tax burdens. It will reduce internal conflict by clearly defining inheritance plans and allow for preservation of family values and long-term vision.
Why generational planning is key to your practice
This type of planning will set you apart from those offering only traditional financial services. You will build deeper multi-generational relationships which means that the next generation will retain you as their long-term partner. It will prevent wealth transfer loss and expand revenue streams. You will not only help families secure their future, but also help build a legacy, ensuring long-term career success.
Our Integrated Wealth Planning process lays the foundation for you to equip yourself with the necessary tools to have meaningful conversations with your clients. You will also foster long-term relationships to grow your business, and most importantly, help your clients achieve long-term financial wellness and successfully transfer their wealth to the next generation.
Our financial planning coaches can support you with:
- Identifying opportunities in legacy planning
- Communication across generations.
- Family and business charter guidelines
- Creating a legacy meeting agenda.