In part one of this series, we talked about living in a volatile, uncertain, complex, and ambiguous world. In this second part, we have case studies and a framework you can use to build stability in today’s VUCA world.
Wealth Inflows and Outflows
Owners need to understand how wealth travels through and impacts the growth of their entire portfolio of assets.
Wealth is not static, so understanding and managing the top and bottom lines of the equation for your family’s total wealth is essential. On the top line, you need to know how assets are growing across all categories. Return on capital, reinvestment, smart bets, diversification, and market value appreciation are all factors.
Understanding (and managing) the family’s wealth also requires attention to how assets are being depleted by activities such as dividends, family lifestyle consumption, and philanthropy, as well as bad bets, cost of debt, ownership buyouts, taxes, inflation, and estate planning for the entire portfolio of assets.
With this high altitude, portfolio perspective, and a solid understanding of how wealth travels through the family enterprise, owners are ready to put in place the strategies needed to grow multigenerational wealth in turbulent times.
The SGA Formula for Managing Wealth
Stability and growth have long been the hallmarks of multigenerational family wealth. “Don’t rock the boat” and “Stay hungry” are messages often heard in enterprising families. In today’s turbulent times, stability and growth remain vital to success, and agility is the critical added ingredient.
Families that want to navigate changing times and build wealth through generations successfully use this three-part formula for managing their total wealth: Stability, Growth, and Agility (SGA).
Stability: the Foundation
The ability to withstand shocks is the bedrock of a strong wealth strategy. A strong financial foundation is perhaps the most obvious requirement and includes the availability of liquidity (cash) to honor commitments and a conservative balance sheet (low debt). Family businesses are celebrated for their strong balance sheets, generally an indication of their superior performance in any sector.
Ownership stability is also fundamental. United and engaged owners with a long-term commitment to the future of the family and the family enterprise are essential. And – linking the two – is a well-oiled governance system with a focus on strategic (versus operational) issues, efficient decision-making processes, and effective mechanisms for coordinating family and owner interests with business and investment interests.
Stability In Turbulent Times: a Case Study
One of my clients is a fourth-generation-owning family with a large holding company based in the United States. Its legacy business is a multi-billion dollar industrial manufacturing company that serves customers in multiple markets and sectors and has become a technological leader in its industry. The family enterprise’s other assets include real estate holdings and direct investments in businesses unrelated to the family company.
Effective governance and owner commitment have helped the family and its business to effect smooth generational and ownership transitions and maintain a long-term perspective and patient capital, even during tough times. Four major branches of the family are represented on its owners’ council, which oversees the family holding company.
Going into the Covid-19 crisis in 2020, financial stability was a priority for the family owners. To assess all of the family’s business and financial assets and the portfolio’s ability to withstand Covid pressures, the council conducted an exercise that categorized each asset as green (generating cash, keeping), red (not generating cash, restructuring or divesting), or yellow (not sure, wait).
On the cash side, they ensured that liquidity and family wealth weren’t depleted by excessive consumption. The company’s financial stability was paramount – one of the family’s values – so there was support from owners when the council reduced dividends and revamped some owner liquidity programs to make resources more accessible to the business in the short term.
Council members invested considerable time to stabilize the company’s ownership base through the crisis. They respected the owners as important stakeholders, giving them regular and abundant information, a voice in decisions, and a forum to express their concerns They reminded family members of their shared values, vision, and grit in the face of other crises and that they were all in this for the long term and willing to make short-term sacrifices to survive and thrive.
An important lesson in this story is that you don’t build stability spontaneously when you need it. The family had the foundation in place for financial stability, owner commitment, and effective governance so that they were prepared and could move quickly when faced with a destabilizing shock.
In the last of this series, tune in next week when we look at the different growth strategies your family business can employ.
For more in this series:
- Family Wealth: A New Playbook for Turbulent Times, Part 1
- Family Wealth: A New Playbook for Turbulent Times, Part 3
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