Winning in Business and Families
The following excerpts are from The 10 Richest Families in America article in Wealthmanagement.com. 7/24/17
The article sites the names of wealthy families. I would like you to ask yourself two questions as you read about these families: 1) Why do we recognize these names, and 2) Why are they wealthy?
Walton Family, $103 Billion: “Not only the richest in America, but in the world. Now in its third generation, with the first Walton grandchild joining the board in 2016, the Wal-Mart enterprise is a definitive example of a successful family office.”
Koch Brothers, $82 Billion: “Koch industries is the second-largest privately owned company in the United States, and a great example of the internal strife that threatens to derail many family businesses. Koch’s four sons were involved in litigation that spanned more than a decade regarding their interests in the family business. Two of the sons are now the principal owners of the company after buying out their two other brothers.”
Mars, $78 Billion: “One of the biggest candy manufacturers in the world (among other food products). The company is famous for their secrecy and privacy.” By the way, M & Ms are my favorite.
Cargill-MacMillan, $49 Billion: “Cargill is the largest privately owned corporation in the United States. This family has more billionaires among its members (14) than any other in the world, according to Forbes.”
Cox, $41 Billion: “The cox family fortune derives from 1898, when James M. Cox purchased the Dayton Evening News. The company went on to become a media conglomerate, but the family has diversified into the automotive technology industry over the past decades.”
S.C. Johnson, $30 Billion: “Founded in 1886 as a parquet flooring business, it is currently in its fifth generation of family ownership. A multinational brand. . .of products so popular they have become generic terms.”
Pritzker, $29 Billion: “Founded the Hyatt Hotel chain and involvement in cruise lines and tobacco. Noted for use of multiple trusts to avoid taxes, before the practice was commonplace for the wealthy. In the 2000s, some of these trusts became subjects of a family feud, resulting in divergent interests.”
Johnson, $28 Billion: “Edward C. Johnson II founded the Fidelity brokerage firm in 1946. Johnson’s granddaughter, Abigail Johnson, took over as CEO in 2014.”
Hearst, $28 Billion: Media conglomerate founded in 1887. Think Hearst Castle in California. “According to Forbes, as of 2016, the company (family) now owns 46 newspapers, 340 magazines worldwide and has stakes in cable TV channels, such as ESPN and Lifetime.”
Duncan, $21.5 Billion: “After 11 years of working at a midstream pipeline company, Dan L. Duncan left and founded his own pipeline business, Enterprise Products Co., with $10,000 and two propane delivery trucks in 1968. His hard work eventually paid off.”
So, how did you answer the two questions? If it is just because they are wealthy, that misses the point. There have been thousands of very wealthy individuals throughout the ages who have disappeared, never to be heard from again. What is the difference? When the “lost in time” group did their estate work, they used the traditional method of distributing everything to their children, and their children and grandchildren lost it all. Notice that the above families created businesses, enterprises, and family offices that kept the wealth in the family and under the control of the entire family, rather than putting all of the family wealth into the hands of heirs who were unprepared to steward it effectively. Here are the reasons these families created billionaires; and, while not necessarily billions, your family could learn from them how to create multi-generational wealth:
- Prevent loss of the family’s wealth by overcoming the proven 70% statistic of wealth lost when it passes to each generation
- Build greater wealth for every family member. Each person’s share of the pie can grow substantially as the whole pie gets bigger
- Greater financial power. More opportunities are available for an enterprise with a $50 million net worth than an individual with a $5 million net worth.
- More net worth offers more diversification that can reduce risk. Like the aforementioned advantage, a family that retains $50 million can invest in stocks, bonds, exchange traded funds; industrial, commercial, and residential real estate; and private equity and business investments. An individual net worth of $5 million limits the number and types of investments. Additionally, many investments have minimums that would keep the individual from participation or incur a higher concentration in a few investments, thus increasing risk.
- Cost effectiveness through economies of scale. Individuals hire their own CPA, attorney, financial advisor rather than benefiting from the availability of the Family Enterprise Office advisors. Many advisors offer reduced fee structures when they can work with one entity rather than multiple individuals.
- Efficient use of time and talent. When each person must find, interview, and research their own advisors, investments, and large purchases they are taking time away from other important activities. This can be difficult in families when both parents are working and raising children, resulting in little or no due-diligence when making important decisions, or decisions are procrastinated. The Family Enterprise Office offers these services to all family members relieving them of the time needed to do it on their own
- Tax mitigation. For estates over $11 million today, the combined federal and state gift and inheritance taxes could deplete the estate by 40% to 50%. That means heirs may only receive $500,000 for each $1,000,000 of estate value over the $11 million exemption. It is impossible to get into specifics here, but it is conceivable individuals receiving a large inheritance will pay more income taxes than if the family entity conducts overall tax planning
- Family involvement avails the family to significant tax and cash-flow benefits, but more importantly, to family bonding and moral responsibility. We promote boots-on-the-ground philanthropy. The true value of philanthropy is not writing the check, but personally engaging in the activities and causes the money supports. A family working together at the soup kitchen, digging water wells in Africa, or distributing medicine and supplies to the sick is a family becoming stronger and more unified.
- Teach financial stewardship so heirs build and preserve their individual wealth and encourage self-reliance rather than dependency on an inheritance
- Increase the probability of achieving all family members’ financial goals such as education, buying homes, etc.
- Avoid or decrease duplication of costly legal, tax, insurance, investment, and accounting services and products
- Efficient use of resources
- Effective allocation of resources
- Primary income source for family members who are employees of the Family Enterprise Office or Foundation
- Supplemental income for family members not employed by the Family Enterprise Office
- Fund the acquisition or development of new family businesses
- Have a workable and acceptable plan for the transition of an existing family business
- Have a workable and acceptable transition plan in place for the Family Enterprise Office
- Asset protection. Creating varied and multiple entities at the family level can insulate the family wealth from lawsuits, divorce, creditors, and imprudent decisions
- Family fights. Proper advanced planning, improving communication and trust, and effectively managing everyone’s expectations can reduce the probability and impact of legal disputes and family conflicts among family members when wealth transfers through each generation. Legal documents alone cannot anticipate all the issues that will arise in twenty, forty, or sixty years; increasing the probability legal actions between family members will ensue at some point
Three, four, and five generations from now will anyone in your family be wealthy? Will everything you built today be growing or gone? Everyone talks about learning from their successes and failures. I believe it much better, and less painful, to learn from other’s successes and failures. It is much better to benefit from the wisdom of those who have gone before!
You can get more insights from my book, You Can Have It All-Wealth, Wisdom, and Purpose. Strategies for Creating a Lasting Legacy and Strong Family” at our website below.
You can review articles on investing, financial planning, business planning, and family coaching and wealth transfer at our Learning Hub Kip Kolson, President
Family Wealth Leadership helps families transform True Wealth into purpose so every generation can be healthier, wealthier, and wiser by coaching parents and children in how to invest, build, operate, manage, and work as a team to achieve a worthwhile and common purpose that creates a legacy of significance. www.familywealthleadership.com