This blog has been running almost nine years. One of its most commonly accessed articles (more than 3,300 times) is What Happened to The Vanderbilt Fortune? I suppose people like to look at the demise of great fortunes.
It also raises the question of why people are concerned about the concentration of wealth. If you look at the great fortunes of history, none are still visible. Even the wealthiest people from 40 years ago are not seen in the wealth of their heirs. Perhaps we should take a longer view on this problem.
The Vanderbilts are an example of why it is hard to retain concentrated wealth. With estate and income taxes, it is even more difficult now.
I came across a video on YouTube that addresses the same points. It is about 15 minutes long and covers the same material but with pictures of their extravagances and more detail about the children and grandchildren. How the Vanderbilt Family Lost Their Entire Fortune.
The Commodore, Cornelius Vanderbilt told his son, “Any fool can make a fortune, but it takes a man with brains to hang on to it.” When he died his son William inherited the fortune and in the 8 years until his death, he doubled it. Certainly doubling money is a good way to hang on to a fortune. The important point here is vast wealth needs a director. Better if it is just one. Fractioning the fabric of the family fortune is the beginning of its disappearance.
Eventually grandchildren are the owners of the wealth. It is a truism that of businesses controlled by third-generation owners, few succeed. In many cases survival is in question. Third generation owners are too remote from the skill set and the attitude of the founders. They have always had privilege and many feel entitled. Entitled is not the way to build a fortune, nor even sustain one.
Multi-generation family businesses exist, but the people who have inherited and run them have many of the same instincts as the founders. Those have been taught. Without guidance, entitlement is a mindset easier to acquire than responsibility, growth, and discipline.
It is a Darwinian landscape. Even vast fortunes won’t survive disinterested leaders. In each family that has prospered through generations, there has been one or perhaps two children given authority to operate the assets, while other children become passive shareholders. In most cases they have been employees and tested with growing responsibility. It is an easy mountain to fall off. Eventually only the most skilled reach the top.
In businesses where a single founder has exercised brilliant control for a long time, giving up control to the next generation is a decidedly difficult decision. Many are incapable of it and the drive and enthusiasm of the young is not carried forward. To become the chief executive of the family business at 60 is not a solution that works. If you can find the person, transferring much of the control by the time they are 35 to 40 is most useful. They will have had time to be sure they want to do it, and the founder will have had time to transfer much of their knowledge and skill. Be especially aware of transferring the founder’s personal network. In a perfect world the founder will remain as chief counsellor, but with the caveat that their skill set will become obsolete and the younger operator will be closer to day-to-day reality.
In an imperfect world, the founder passes away without having prepared enough. Information and connections are lost. The successor will be faced with a frightening array of problems. From reassuring customers, suppliers, lenders, and key employees to finding the money to pay the inevitable taxes.
Every business should at a minimum have a fire drill plan. Who signs cheques, for example? An owner need not be dead to be unavailable for routine tasks.
More extensive transfer plans should begin as soon as a successor manager has been identified. Well before they take over the role. Think of it as an engagement period. You should not emulate the Ford Motor Company transition. It was cobbled together in the six weeks prior to Henry Ford’s death. At the other extreme is the Bronfman family. Their succession plan, while complex, is at least 70 years old and still operating to retain concentrated control while sharing the wealth among the many descendants.
Business succession planning is difficult and easily postponed. Eventually though it becomes inevitable.
If you leave it too long it becomes uncontrollable.
Have a plan B. Know who the executors should sell to if you pass before it has begun.
Own life insurance to protect the liquidity needs for taxes, reduced lines of credit, and the cost to deal with partially complete projects.
If parents retain a significant equity position in the companies, insure the new CEO. The parents could not easily step back in and the discount to sell may be significant as there is no continuing management at the highest level.
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