Inter-generational financial planning is a very effective way to build strong and growing family wealth. Properly done it can minimize the leakage that occurs when doing things in conventional ways. Of course, nothing is applicable to everyone and everything useful includes difficult decisions.
Yesterday I talked about a way that is simple and straightforward. Businesses and some other complex assets do not fit that description.
Many years ago, the accounting firm I was with had an associate in Chicago that had an interesting program as part of their financial services package. Massed Financial Punch or MFP.
The idea behind MFP was that businesses are complex, difficult to understand and even more difficult to fit effectively into their surrounding world. Not everyone has the talent to make it work. Not everyone who has the talent will be comfortable having an audience of siblings who second guess decisions based on criteria that are not relevant.
The solution: transfer business assets to the most able and let the rest have mere money for their share. Do not dilute the financial punch of a successful business. Financial punch lies in management not ownership.
These people were not the first to use the technique. The Rothschilds have done it for centuries. Pruning the family tree as they describe it. The Bronfmans did it in the middle of the 20th century.
The non-business part of the family may end up with financial wealth but are uninvolved in the business that created and nurtures it. Some use that wealth to found their own empires.
The idea of MFP produces a process to transfer all of the parent’s holdings, financial and other, to the next generation. Transfer the financial part independently of the other parts. Transfer the financial part in ways that support the transfer of the “other” part. Clearly, other is the real value.
“The other” includes the skill, knowledge, contacts, experience and team leadership talent that are necessary to operate, as opposed to own, the business. It is easy to own an airplane, but ownership alone says little about your ability to fly it successfully.
When you transfer a business to your children, spend most of your time on the “other” parts. There are accountants and lawyers who can do the financial part in their sleep. Engage them for agreements and to reduce the tax and other leakages, but those advantages alone will not guarantee success.
A sound transfer of the “other” will work even if the financial arrangements are weak. Just not as well. By comparison a perfect financial arrangement will fail if no one can run the business.
Start early and pay attention to transferring the other.
Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.