Children

Second Generation Owners Are Often Different from Founders

Smart business families recognize this and adjust their vision accordingly

Key Takeaways:

  • Founding business owners and their children often have differing management styles, communication styles and expectations.

  • Founders appreciate directness and simple solutions.

  • Founders’ children often need more sophisticated solutions in which emotional considerations are as important as the financial ones.


Most business owners I know fall into one of two camps—first generation business owners or later generation business owners. Business families and their advisors who don’t take the time to understand the differing management styles, communication styles and expectations often run into trouble down the road.

Starting a business is incredibly demanding

Starting a business is hard work. Many founders work for years—and against all odds—to create a business that succeeds. Ask any successful business owner who has been around for a decade or two—they’ve experienced countless ups and downs. Often the downs have put the owners on the brink of losing their business. But they never give up!

To make it through the challenging times, entrepreneurs have to be very tough and resilient. They will tell you exactly what they think. They don’t pull punches and expect you to do the same.


First-generation business owners have a thick skin

The good part about first-generation business owners is that you can say almost anything to them as long as you do so with respect. But you’d better be direct and avoid legalese, MBA-speak and fancy marketing terms. If you don’t, you probably won’t be taken seriously.

Second and third generation owners tend to take a more nuanced view of the business. They’re more open to outside ideas than founders tend to be. However, Next Gen owners often make the mistake of thinking that founders will take their advice and implement it without knowing how the advice fits in with the business’s long-term or even short-term goals. If you don’t spend time understanding what drives founders, there’s a good chance they’ll just ignore you or cut you off mid-sentence.

Sure, many founders are gruff. But don’t walk on eggshells around them. To gain the trust of founders, you must get right to the point. If you’re able to do this, working with founders becomes much easier and more enjoyable.

First generation owners aren’t only tough at the workplace

The drive, resiliency and thick skin that it takes to start and build a business is one of brutal honesty. If you’re not brutally honest with yourself, it’s too easy to find excuses for things not working out.

In my experience, first-generation business owners aren’t only tough at work; they’re very tough at home. First-generation owners tend to be tough on their children. Tough love rather than unconditional love is more often their style. The children of business founders often feel they are under the thumb of their parents. This is especially true if children of founders decide to join their parents in the family business.

Second-generation owners are a different story
For their first 25 or 30 years of life, founders’ children will tell you they heard nothing but criticism from parents who had no patience for their mistakes and no tolerance for excuses. There’s something to be said about the value of tough love when so much of parenting today borders on coddling and “helicoptering.” But, this often leaves founders’ children feeling inadequate, with a strong need to prove themselves.

When founders’ children finally get a chance to run the family business, they often have no patience for founders and other advisors telling them where they’re wrong. Instead, they expect their employees, customers, clients and advisors to tell them how wonderful they are and how brilliant their ideas are.

A successful relationship with second-generation owners often means being a cheerleader instead of a true thinking partner. Although second-generation owners start their business careers with a huge advantage over where their parents started, they often struggle to maintain its success, much less take it to the next level. Without accepting honest feedback, it’s just too easy for second-generation owners to take the company in directions that hurt more than help.


The conundrum of second-generation owners

On the flip side, working with second-generation owners can be fun if they’re willing to be coached. You need to feed them ideas in the form of questions and let them adapt your ideas as your own if needed. Don’t force your ideas down their throats, or you’ll just get pushback.


Well-educated second-generation owners may want to use advisors and consultants with prestigious academic degrees and career credentials—people that founders would never consider bringing in. On the surface, it may seem like second generation owners are injecting unnecessary complexity into the business, but it’s best to let NextGen figure that out on their own. As a founder, you can suggest some ways in which simpler is usually better, but don’t try to override the process.

Being blunt with second and third generation owners generally won’t work. You must remember where they came from. It’s not necessarily coddling, but you have to be open to the possibility that there could be a better way of doing things.

Conclusion

One final caveat—generalizations are often wrong. I’ve encountered more than a few (first-generation) founders who are open to new ideas, outside expertise and a more collaborative work environment. Likewise, I’ve worked with many founders’ children who are gruff, relentless and think only one ways of doing things—their way—is right. Be aware of generational predispositions and try to leverage the strengths of each generation’s work habits and management style. Your customers and clients will thank you, and family gatherings around the dinner table will be a lot less stressful.

Feel free to contact me any time if your family or a close friend or relative’s family is considering a leadership change in the family business.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Eradicating Entitlement

Even families that don’t consider themselves highly affluent can be raising “trustafarians” without realizing it

Key Takeaways:

  • Entitled people, especially children, don’t develop the capacity for self-reliance or independence.

  • Even in families of modest affluence, it’s essential for kids to learn about spending wisely, saving diligently and sharing generously.

  • Warren Buffet said, the perfect amount to leave your kids, is ''enough money so that they would feel they could do anything, but not so much that they could do nothing.'' 

The wordentitlement” has many negative connotations, but it wasn’t always that way. In the past, it was often about having a right, as in “I’m entitled to certain rights.” In reality, it’s a little bit of both. Many times successful parents become concerned about their childrens’ feelings of entitlement stemming from their family’s ritzy neighborhood, their high-end cars, their affluent school district or the expensive sleep away camp they attend.

Your children or grandchildren don’t have to be trust fund recipients (i.e. trustafarians) to exhibit signs of entitlement that can be difficult to shed in adulthood. We all want to do what’s best for our children. But, giving kids too many things at an early age can prevent them from developing self-reliance and independence as they get older.

Another danger of entitlement is that children become so self-absorbed (both personally and materially) that they have no what other people want or need, particularly those who are less fortunate.

As Warren Buffet famously said, the perfect amount to leave to your kids,  is ''enough money so that they would feel they could do anything, but not so much that they could do nothing.''

Real world example

One family I know, in which both parents are first generation Americans, created significant wealth for themselves. Their children enjoyed the fruits of that hard work. Naturally, the parents wanted provide their kids with more than their parents gave them --more experiences, more opportunities.

The parents were well intentioned, but even those good intentions can give the kids unrealistic expectations. For instance, both kids expected to receive a Mercedes upon graduating from high school—which they did--because that’s what many of their affluent peers received in their circles.

Despite their advantages, both kids started to act out, which teens of all backgrounds inevitably do. The boy even got in trouble with the law, but thanks to his family’s wealth, they were able to hire top attorneys to get the boy off the hook. Unfortunately, he was kept entirely out of the legal process so he never learned his lesson. Before long, he got in trouble again. The parents realized too late that their good intentions—to protect their child—preventing the boy from learning valuable life lessons about being accountable for his actions and suffering the consequences. It took him many, many years to get on the right track to responsible adulthood and caused his family significant pain.


Add inherited wealth to the list of addictions

The Latin root of the word addiction mean “is a slave to a master.” When people are addicted to something, say a drug or alcohol, they’re slaves to that master. In the same way, when heirs inherit wealth, they get used to the regular “hits” from their trust distribution “dealer.” They organize their lives around their family’s money flow, rather than forging their own path to adulthood and self-reliance.

So, how do parents prevent this from happening? Start with the process of “naming.” When we name something, we’re calling it out. To name something, we don’t want to clobber it in the head with a baseball bat and call it “entitlement.” Instead, families that succeed and create family harmony, unity and cohesiveness over the generations are ones that have meaningful conversations about what they have. They discuss the potential risks of their wealth also the potential benefits it can provide to themselves and to others. In many ways, wealth and money can be viewed as members of the family—and we always have to respect our relationship with those special family members.


The Thee S’s

In a family of affluence, it’s important for the kids to learn about Spending, Saving and Sharing. This can begin as early as age five or six. I know of a family in which the father gave a dime to his daughter when she was 7 or 8 years old and he said, “We have a lot of these dimes. And so what I want to do is give you this dime, and we’re going to decide how we’ll spend it, how we’ll save it and how we’ll share it.” That was the beginning of the daughter’s wealth and money education.

I often facilitate family meetings around the qualitative or emotional issues that accompany wealthy families. A three-generation family business had multiple liquidity events over a short amount of time. That was very new to them, and subsequently what they decided to do in addition to getting technical advisors to help them, they brought in a family counselor to help them have meaningful and respectful conversations about what they have and what they want do with it.

Conclusion

For children of privilege, wealth can be a tremendous tool for helping others and for achieving a life of fulfillment. It can also be a dangerous and highly addictive drug. It’s never too early to teach your children and grandchildren about the 3 S’s and the responsibility of money. Contact me any time if you have concerns about your gifting or estate planning.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

How Children Successfully Join Family Businesses

7 key considerations

Key Takeaways:

  • Have a family business constitution in place before your children join your business.

  • Make sure you allow your child to make and learn from their mistakes.

  • Have your child successfully work outside your business before letting them start work at your company.

  • Have someone besides you supervise and manage your children when they work for your business.

You have worked very hard to build a successful business. The dream has been to have children join you and continue the legacy that the founder started.

But, before you get excited, stop and think.  For many entrepreneurs, having children join their business is a true joy.  For others their children are an albatross. They wonder why they ever thought it was a good idea to have their children work in their business, much less take it over.

If you are thinking about having children join your business, here are some important considerations:

1. Make sure the next generation is competent.

You don’t want to be in a position in which you have to tell your own child that they can’t stay with the business.  Too often parents let their children join the business only to discover that their children add zero value to the enterprise—and sometimes even subtract value.

A business is not a place where you provide social welfare for a child.  Next Gen must be able to add to the value that the business provides to its clients and customers.

2. Make sure the next owners (your children) have experienced life outside of your business.

The best way to ensure that your child is competent is to make sure they’ve worked successfully outside of your company.  You don’t want to have your child join your company as their first “real” job.

One of the most important rules you can adopt in your business is to require your child to earn at least one promotion while working outside the family company.  This way, someone else can handle their early career training and make an objective decision about how competent the child is.

3. Have a real job for your child.

After your child has proven him or herself outside your business, you’re in a better position to have them join your company. But, suppose you don’t have a job that fits their skills and experience?

This is not the time for you to make up a job for them.  Make sure your child holds on to the outside job until you truly have a job that fits their skill set.

When it’s time to bring a child into your business, make sure they’re not joining  at a level higher than the job they had outside your company. You never want to have to tell a child that they aren’t unwelcome in the family business after an unsuccessful debut.

4. Think about your compensation policy for your children well in advance.

Too often I see children overpaid or underpaid. Either way it’s a big mistake. Make sure you have a firm salary policy in place. If you do, it’s important that you pay children comparably to what non-family members earn for similar jobs.

If your children are overpaid, then non-family employees will find out and they’ll resent it.  If your child is underpaid, he or she will find out and resent you for it. You’ll have some uncomfortable family dinners as well.

5. Never have your children report directly to you.

Part of supervising an employee is correcting his or her behavior and work. This is not something you want to do with your child.  Let’s face it; you have a history with your child around discipline and it’s often not a very positive one.

Even though you have policies that work well for non-family members, it’s rare that those policies work for family members when they’re coming from a parent.  When a non-family member supervises your children, you’ll likely avoid hard feelings that result from having to reprimand a child for their workplace behavior or performance.

6. Remember, Next Gen will run your business differently than you did.

I’m hoping that you successfully integrate your child into the business. Now it’s time for you to transfer real responsibility to your child. Just know that your child is going to approach problems and opportunities differently than you do.  This means their approach to solving these issues will also be different, and in many cases, better than how you would do it.

You’re going to want to look at the results your child’s methods produce.  You need to let your child make mistakes and you need to be there to help them learn from those mistakes. 

Think about how you learned on the job.  I bet you made plenty of mistakes along the way.

7. Successful transitions come with a process.

I like to see family businesses develop what I call a “family constitution” for joining the family enterprise.  Your family constitution doesn’t have to be complicated.  In fact, it can be as simple as the bullet point list below:

  • Have your child achieve a certain level of education.

  • Have children work outside the family business for at least two years.

  • Make sure your child has earned at least one promotion from a non-family business before joining yours.

  • Don’t start your child in the family business at a level higher than they had at their last non-family business.

  • Pay your child at the same scale that you would pay a non-family member for a comparable job.

  • Have your child’s direct supervisor be someone who is not in your family, especially you.

  • Have a system in place for accepting and learning from your child’s mistakes.

  • Let your child do things their way once they have proven themselves-- unless their idea will truly put your business at high risk.

Conclusion

I’m hoping that you’ve successfully brought your child into your business.  Years will have passed and you know that it’s time for you to let go and have your child take over. This will be a challenging time for you.  You’re going to need to learn how to let go.  You’re going to need to find a compelling next chapter in your life.  You’re going to have to let your child be his or her own person.

Successfully transitioning your child can be an incredibly satisfying experience.  Have a system and stick with it.  You’ll be glad you did.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

What’s Keeping the Affluent Up at Night? Their Kids

It’s never too early help kids improve the financial literacy of the young people in your life.

Key Takeaways

  • Research shows that high-net-worth individuals care more about the impact of wealth on their heirs than how much (or how little) wealth will be passed on.

  • The average American college student graduates with $37,000 in student loan debt.

  • Two thirds of affluent Americans think the young people in their lives place too much emphasis on material possessions. Over half think they are naïve about the value of money.

  

Does great wealth really bring fulfillment? An ambitious study of the highly affluent by Boston College suggests not. The study found a surprising litany of anxieties: their sense of isolation, their worries about work and love, and most of all, their fears for their children.

Further reinforcing that finding, the biannual U.S. Trust Survey of Affluent Americans asked parents what they worried about most. Their primary worries had nothing to do with tax or wealth-transfer issues. No, their top six concerns were centered on the impact of wealth on their heirs!

  • 65 percent said: “Too much emphasis on material things”

  • 55 percent said: “Naive about the value of money”

  • 52 percent said: “Spend beyond their means”

  • 50 percent said: “Initiative could be ruined by affluence”

  • 49 percent said: “Won’t do as well financially”

  • 42 percent said: “Hard time taking financial responsibility”

Research found that the greatest  fear of affluent successful people is not about making more money, or protecting what they have—it’s about how their wealth will affect their heirs and their heirs’ families. Dr. Bob Kenny, the principal researcher of the Boston Study and also a visiting faculty member at the Institute for Preparing Heirs, stated that philanthropy is an excellent vehicle for discovering meaning and value in the wealth that heirs receive. Philanthropy he once said, “helps teach the giver that money sometimes carries its burden with it and can harm or unsettle a recipient if given without caution.”

Perhaps participating in the act of philanthropy gives an heir a clearer view of some of his or her own personal feelings about inheriting wealth.

You might say the big secret is that the rich consider their greatest treasure to be their children, not their financial assets. To hear that about the rich may alter conventional wisdom at a time when we are facing the largest transfer of wealth in history—almost $1 trillion dollars a year will be passed down to future generations for the next 50 years in the United States alone! Couple that with a historic post-transition loss rate of 70 percent and you have both a tragedy and an opportunity in the making.

Learn how to initiate conversations about the topic of money and its impact on the future generations in your family. It’s the primary concern of the parents (not just the latest tax regulations).

In the future, well-prepared parents and grandparents will help complete the second half of the estate-planning equation—preparing their heirs for the assets. That is the future of estate planning—and good parenting.  

Thanks to The Financial Awareness Foundation, (TFAF) April is officially Financial Literacy Month in the U.S. but there’s never a bad time to focus on financial education of the next generations. A lack of financial preparedness has huge societal costs, and in the coming years as Americans age, these costs will likely increase.

We need to educate all young Americans about the importance of starting early. For example, young workers will need to save close to $1,000 per month to remain in the middle class; $925 per month for 30 years at 8 percent grows to $1.26 million, but that amount saved for 20 years only grows to about $508,000. Young people are often surprised to learn that the few hundred dollars they’re saving each month may not be enough to retire into a middle-class lifestyle.

According to TFAF, too many young people and their families are burdened with excessive education debt and other forms of debt. Student loan debt exceeds $1.3 trillion and is the second largest class of consumer debt after mortgages. For instance, the college class of 2016 graduated with an average of $37,000 in student loan debt.

We need early financial education in the home, mainstream financial literacy programs starting at a young age, and government funding for a public awareness campaign much like those on public health and safety issues. It should be incorporated into school curricula, media campaigns, corporate wellness programs, and, most importantly, ongoing parental discussions.

The next step is for you to take action. Encourage the young people in your life to educate themselves about financial freedom. They can start by reading some articles, using a mobile budgeting app, or signing up for a personal finance class at a community college. Encourage them to try to live on less than they earn each month and automatically save the difference. While they may be able to save only a little, it is OK to start small and grow into a larger savings plan over time. The key is to start now!

Conclusion

By doing so, you and your heirs will have more financial freedom and personal choice—two worthwhile things that money can help buy.  Don’t hesitate to reach out to us for assistance with short-term or long-term financial goals you may have for yourself or your young adult children. We’re here to help.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Diversified Asset Management, Inc. – Eye on Money Mar-Apr 2018 Newsletter

We invite you to check out the new issue of Eye On Money! Inside are articles on:
    
Planning for long-term care. Learn about your odds of needing it, the costs, and what you can do to help prepare for those potential costs. 
 
The cost to raise a child. Find out what families spend on average to raise a child. 

6 ways to simplify your finances and reduce the time you spend managing them.

Individual bonds or a bond fund, which is better? Here’s a look at four of their key differences. 

Also in this issue, you can check out three things you may not know about IRAs, peruse nine ways to make the most of a tax refund, learn about the types of investments that may be helpful in generating retirement income, and see what financial tasks newlyweds should tackle. Plus, you can explore the coastline of Ireland, find out how New Orleans is celebrating its tricentennial, and test how much you know about travel destinations from around the world.

Please let us know if you have questions about anything in Eye On Money.

 

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To read the newsletter click on the link below:

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Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.