Five tips for staying relevant for the next generation.
Today’s investing families are considering a range of different approaches to managing and enhancing their wealth, including ones that allow family business members to actively pursue new opportunities.
This article was originally published in Kellogg Insight, a publication of the Kellogg School of Management at Northwestern University. It is used with permission by Industry Week.
In 1917, John D. Rockefeller was worth about $25 billion—adjusted for inflation—thanks to his stake in Standard Oil, the predecessor of ExxonMobil. He gave his son roughly half that fortune, and in 1934 John Jr. established trusts for his six children. Twenty years later, another set of trusts was left to his grandchildren. With each generation, trusts divided, splintering the fortune.
That’s how inheritance used to work,” says Jennifer Pendergast, a clinical professor at the Kellogg School and director of the Center for Family Enterprises. Either members of the succeeding generation working in the business bought out their parents; shares in the business were gifted across dozens, even hundreds, of family members; or the business itself was liquidated. “Create a trust company, manage a balanced portfolio, and spend no more than four percent of your assets year-over-year,” she says.
While these legacy models are still an option, today’s investing families are considering a range of different approaches to managing and enhancing their wealth, including ones that allow family members to actively pursue new opportunities. Pendergast describes this approach as becoming an “enterprising family.”
“Enterprising families are open to the idea of expanding beyond the legacy business,” Pendergast says. “Instead of keeping cash in the bank, you create the next entrepreneurial engine and retain the capital within the family. Businesses might come and go, but you can sustain that wealth across generations.” These families move beyond defining themselves as owning a family business to being a family in business together.
The benefits—such as the ability to pursue opportunities that align with family members’ values, as well as engage the next generation—can be huge. Not to mention that families can survive beyond a legacy business that may no longer be relevant to the marketplace. So how does an enterprising family find its footing? Prendergast offers five steps.
