{"id":7178,"date":"2017-06-27T10:02:45","date_gmt":"2017-06-27T08:02:45","guid":{"rendered":"http:\/\/www.munich-business-school.de\/insights\/?p=7178"},"modified":"2020-10-30T08:40:00","modified_gmt":"2020-10-30T07:40:00","slug":"family-business-wealth-transfer","status":"publish","type":"post","link":"https:\/\/www.munich-business-school.de\/insights\/en\/2017\/family-business-wealth-transfer\/","title":{"rendered":"Courage Contribution: How Business Families Can Assure Long-Term Performance by Aligning Their Operational Portfolios With Family Capabilities"},"content":{"rendered":"

The following article is an excerpt of Bergfeld\/ Bannys\/ Bergfeld (2017): Resilient Family Business Systems. Achieving Longevity by Aligning Portfolio Strategies with Family Capabilities, to be presented at the Academy of Management Conference 2017<\/a>, a leading international business research conference, at the Symposium on \u201cLongevity and resilience at the interface of family, business and environment“. <\/em><\/p>\n

The Great Wealth Transfer<\/h2>\n

During the next 30 years, over 40 trillion USD in assets will be transferred in the US alone \u2013 from the \u201cbaby boomer\u201d generation to their children and grandchildren. The portfolios that constitute this \u201cGreat Wealth Transfer\u201d include all sorts of financial assets, real estate, philanthropic engagements and operational companies. The receiving \u201cNext Generation\u201d of business families around the globe will be asked to steward these assets into the future. With the financial markets seeing extremely low interest rates for the foreseeable future, entrepreneurial action and operational companies will be a must-have in family portfolios that want to outperform exponential growth in numbers of family members over time.<\/p>\n

However: Does the Next Generation truly have the capabilities needed to steward such entrepreneurial portfolios into the future? If portfolios are passed on to a receiving generation that might not have the capabilities to handle them, portfolio values and therefore family wealth are doomed to deteriorate. Often, business families forget to ask themselves this one essential question: Passing on is rather easy, but is the Next Generation really ready \u2013 from a truly objective point of view?<\/p>\n

Some of the world\u2019s leading business families have therefore started to proactively adapt and \u201cclean up\u201d portfolios and match them to the capabilities of the Next Generation. Such an approach can assist in smoothing the transfer as well as assuring the protection of the economic and social value in these portfolios. It also reduces the pressure and burden on the Next Generation and assures that inheriting portfolios becomes a platform for future prosperity and continued wealth creation, instead of life-sacrifice.<\/p>\n

The present academic focus looks at the existence of certain family businesses or business portfolios, and dedicates attention to the positive and negative effects of the owning family, with all the known dynamics around the family, on the assets. Such analysis often starts with the family BUSINESS. However, there has been no bridging discussion yet between a family\u2019s capabilities (with all the different building blocks of it) to own and control a portfolio, and a proactively designed \u201cmatch\u201d of the existing and future portfolio of entrepreneurial activities as a whole. Such an analysis has to start with the business FAMILY.<\/p>\n

Family Capabilities Versus Family Portfolio<\/h2>\n

In short, the capabilities of one specific family might be ideal for a certain portfolio of entrepreneurial engagements, whilst the exact same portfolio might be doomed to fail for a different family with different capabilities. Hence, business families should be asset agnostic and capability conscious in order to structure their portfolios in such a way that wealth is preserved and grows, no matter through which asset type, in line with a potential change of a family\u2019s capabilities from one generation to the next.<\/p>\n

The conceptual model of \u201cFamily Capabilities versus Family Portfolio\u201d consists of two building blocks: the \u201cCapability Formula\u201d and the identification of four possible \u201cPortfolio Modules\u201d that call for certain \u201cCapability Levels\u201d.<\/p>\n

The concept of \u201cCapabilities\u201d amongst successors in family businesses has been analyzed for decades. The importance of knowledge and experience for and in succession processes has been well documented as well, and the importance that \u201cowner-managers need to have capabilities, such as knowledge and skills, motivation and volition (willpower) and ‚affection‘, when using their personal and institutional power\u201d has been investigated too, although with a different focus. The importance of energy and resilience has been looked into intensively in recent years, especially in the entrepreneurship literature and the \u201cbullet-proof\u201d movement amongst young entrepreneurs.<\/p>\n

The \u201cCapability\u201d term has been brought into a specific connection with a family business\u2019 performance by numerous authors too. Herein, it is mentioned that the \u201cCapacity to perform work [\u2026] is determined by level of complexity of mental processing\u201d, where, \u201cwhether individuals actually apply their full potential capability is actually determined by their level of commitment, skills, and knowledge\u201d (King, 2003, p. 175), and that it is essential to assess \u201c\u2026 not only potential capability but also commitment to the business as well as skills and knowledge.\u201d (ibid, p. 179).<\/p>\n

King comes to the conclusion that: \u201cIf the future successor\u2019s potential capability is not sufficient to handle the complexity of the business at the time the predecessor wants to retire, then an interim successor could be selected to manage and mentor the successor until he or she is ready. If that is not possible, then the business could be broken into smaller businesses or be sold. In the end, both the business and the family would be far better off, financially and emotionally, if the successor\u2019s potential capability is in alignment with the complexity of the business\u201d (ibid, p.181).<\/p>\n

In combination of the above streams of literature, the \u201cCapability Formula\u201d for being a family business owner and\/ or owner-operator reads as follows:
\n<\/strong><\/p>\n

\"MBS<\/a>
Figure 1: The \u201cCapability Formula\u201d<\/figcaption><\/figure>\n

Four factors contribute to the \u201cCapability Level\u201d of an individual:<\/p>\n

    \n
  1. Broad knowledge & experience, including well developed professional, personal and interpersonal skills;<\/li>\n
  2. High motivation and a positive attitude, such as the will to achieve (Javidan, M. (2004), p. 240), perform and being a role model for others;<\/li>\n
  3. A high level of physical and mental energy; and<\/li>\n
  4. A high level of resilience, such as the ability to cope with stress, uncertainty and ambiguity \u2013 and also the complexity of mental processing to \u201creorient and restructure\u201d (King, 2003, p. 175).<\/li>\n<\/ol>\n

    Managing complex portfolios in dynamic and highly competitive environments require a high level of capabilities of the Owners as well as the Executive Team. In the above description, it is important to note that in order to reach these high personal capability levels, all four factors have to be developed to a significant degree. This is indicated by the multiplicative nature of the individual factors. For example, low motivation or a negative attitude will result in an overall low level of capability of a family member of the Next Generation, even if the individual received the best education, is equipped with high levels of energy and has a strong resilience.<\/p>\n

    The Portfolio Perspective<\/h2>\n

    The interwoven character of family and business development has been documented well since the beginning of the family business research field, e.g. in Kepner\u2019s 1991 piece The Family and the Firm: A Coevolutionary Perspective.<\/em> Nevertheless, it has not yet been argued sufficiently that the portfolio character and the capability levels of the outgoing as well as the incoming generations have to be aligned. Still, Next Generation may be pushed into leadership positions that are simply \u201ctoo big\u201d for their capability level, or do members of the Senior Generation try to achieve one more \u201cbig hit\u201d, although their own personal capability (in particular the energy factor of the equation) is already decreasing significantly. Here, the well-researched \u201cImpact of the Life Stage on [e.g.] Father-Son relationships in Family Companies\u201d (Davis, J., Tagiuri, R. (1989) is neglected and not recognized.<\/p>\n

    As founders or successive generations begin to consider the end of their entrepreneurial career, the decision of sale versus continuity of the enterprise must be made. In the case of continuity, decisions must be made whether the next leader will be a member of the family versus a non-family member, or both. Before taking the decision if one or numerous member(s) of the Next Generation shall be assuming an active owner or owner-operator role from the Senior Generation, the available capability of these Next Generation family members has to be aligned with the actual and future \u201cCapability Demand\u201d of the portfolio. The capability demand of various assets in a portfolio can be determined by their current performance, their market environment, and the asset strategy being pursued.<\/p>\n