Preserving wealth across generations

You have probably heard of this saying: it takes three generations to accumulate wealth, and subsequent three generations to lose it.

There are a few theories advanced to explain this phenomenon.?

But before we analyse why wealth is lost as it's passed on from generation to generation, let us first examine how wealth is created.

Founders are a special breed of people. They are risk-takers. They find ways to create value, solve problems and get paid for providing solutions in?products or services. The key thing here is the focus- not necessarily on creating wealth but on solving a problem. If your business or service is meeting a need and you attach value to it, then people are willing to pay for it. Do this consistently over time, and founders are able to amass wealth.?

One of the reasons founders are emboldened to take the risk of starting something new, fraught with the dangers of failing, is their mindset. A mindset of having nothing to lose.?

The environment does play a role too. Michael G. Hopf best summarised this state in his classical quote: Hard times create strong men, strong men create easy times, easy times create soft men, soft men create hard times. Growing up in an environment of abundance has the ability to flip the mindset from creating to preserving wealth, primarily informed by the fear of losing it.?

The thought of a founder’s wealth being wiped out at the hands of grandchildren due to the inability to keep creating is scary. In a previous article here, we see court battles by the Founder’s children, which do not allow for the wealth to get to the grandchildren.?

In a stable business environment where everything is working as it should be, there is pressure for the next generation to do something equally big to make their mark. This portends the danger of wasting company resources on untested ideas that are done at a scale too large to fail. Instead, allow the next generation to come in early and make small mistakes. Provide space for them to make suggestions, support their ideas, and provide short feedback loops to reinforce lessons learned. This prepares them for bigger leadership roles later on as they grow into the business.

It is equally important to determine the interest and capabilities of those that would be in line to take over the business. The idea is not to make everyone into an entrepreneur. Allowing children to pursue their own interests while remaining connected to the business invites them to embrace and enjoy the challenge of succeeding in the business even more. Their diverse expertise and skills bring a fresh perspective to creating new value and wealth for the business.?

Ultimately, allowing the next generation an opportunity to see you wrestle with business challenges- from negotiating with suppliers, handling a difficult customer, or presenting a difficult matter to your board- is the best training. People learn by emulating what they see, more than what they are taught.

Founders Freedom is more than happy to help you build a resilient business that can run in your absence and last generations. Whenever you are ready, send us a DM or write to us at?[email protected].

By:?Martin Mutuku,?Founders Freedom