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money disintegrating

Stopping the Disintegration of Family Wealth

I’m writing this blog on US Thanksgiving weekend, and it strikes me that one of the things I’m most thankful for is this weekly project of mine, which has forced me to keep my antennae up, so that I can share fresh thoughts every seven days.

I began this habit in 2012 and while many of the early posts have been dropped as my website moved from one place to the next, this process has been nothing but beneficial for me.

I can selfishly say that even if nobody ever read a single one of these posts, I know that simply writing them has been a useful exercise for me, because it has been essential to the way I integrate everything that I’m learning, reading, and thinking about.

It’s also nice to be my own editor and publisher, giving me free reign over all subjects and how I present them.

 

 

Just One Word as Inspiration

As I’ve done at times in the past, today I’m writing a post that was inspired by one word.

Well, actually, it’s a pair of related words, and it’s the juxtaposition of the two words that created the A-Ha moment that became the spark for this blog.

Those words are:

Disintegrate and Integrate

A few weeks ago I was on a long drive, listening to an audiobook to make sure that I stayed awake, and there it was.

I’m not even sure which book it was anymore, and I don’t know if it was the way the author wrote it or simply the way the reader pronounced the words, but I was struck.

 

 

Cartoonish Disintegration

Something about the word “disintegrate” that had never ever registered in my head was the fact that it is the opposite of the word “integrate”.

Hunh…

I had always had a mental image of disintegration that probably came from watching cartoons.  Picture someone with a ray gun, pointing it at an enemy and pulling the trigger, and they’re reduced to a pile of dust.

If you wanted to put them back together, presumably you’d need to integrate them, or maybe re-intergrate them (?)

 

Family Wealth Disintegration

I typically write about family business and family wealth, and the issues that come with transitions from one generation of a family to the next.

One of the biggest concerns of the Now Generation is always that the Next Generation will not be able to grow or maintain the wealth sufficiently, and that the wealth will eventually disintegrate.

They may not use those words, but that’s a common thread that runs through just about every family whose concern is wealth continuity.

Their top concern may lie in the lack of ability of rising generation family members, it may be that the family is growing faster than the wealth, it could be a stagnating business, entitlement or family discord.

 

 

The Opposite of Disintegration

Back in 2014 I wrote Solid Wealth vs. Liquid Wealth, where I talked about wealth that was “locked in” to an operating business and contrasted that to a post-liquidity event and the challenges around managing liquid wealth.

While I still like that analogy, I think that disintegration vs integration can give us a bit more to sink our teeth into.

So:

If we’re worried about disintegration, why don’t we 

consider ways that we can use integration to counter it?

 

A boat in the water

FOR the Family, BY the Family

A favourite saying of mine is “FOR the Family, BY the Family”.  Let me explain the context of that.

If a family is going to have any chance of having their wealth continue for generations, then they can substantially increase their odds of success by involving as many family members as possible in the plans for how that is going to happen.

In short, the family members need to be integrated into the planning.  That means having conversations with them, which includes more listening than talking.

 

 

Co-Creation Makes Better Plans

I’m not saying that this path is easier than simply dictating all the terms and conditions to them.  I’m saying it has better odds of succeeding.

You cannot expect that this process will all happen quickly or without any bumps along the way either, that’s also true.

But how important is this to your family, after all?

If you fail to integrate those for whom you are planning into the exercise of that planning, you can expect the wealth to disintegrate.

 

Solid Wealth Vs. Liquid Wealth.

While in Philadelphia with my teenage son this past summer, we visited the Franklin Institute and checked out some of their great science exhibits. They have a huge variety of things to see, as well as some live demos scheduled throughout each day.

I always make sure that we come up with some kind of a plan to see the most important stuff in some kind of a coherent fashion, and the last demo we saw really stuck with me.

It was about the changing nature of water through a range of temperatures, from ice to water, and then from water to steam. The guy doing the demo was the same man we had seen earlier in the day showing kids some cool stuff involving liquid nitrogen, and we both enjoyed his way of getting the little kids into it, and garnering a lot of laughs along the way.

I can’t say that either of us actualy learned anything new, but for some reason an important analogy popped into my head. As usual for me, the only way to do it justice is to write a blog about it.

Of course the ice-to-water-to-steam concept also applies to many other forms of matter, but I started thinking about how it applies to wealth, and more specifically family business wealth.

An established business, that is profitable and well run, represents a form of wealth that most people consider solid. When a family owns such a business, they often try to find the best way to pass this solid wealth on to future generations, as they see the value and potential permanence of the wealth that it holds.

Passing a business from one generation is often quite tricky, as the statistics surely bear out, but the stories of those that succeed are an inspiration to those who are attempting a similar feat.

In many cases, and for many reasons, passing the wealth down in the solid form of a business is not possible or practical. In many of these instances, the business is sold off to others instead, in what is often dubbed a “liquidity event”. How convenient for my analogy, that the wealth has gone from solid to liquid.

Liquid wealth has its own pros and cons, of course. The biggest advantage is the flexibility that it affords its owners, especially as far as diversification and asset allocation are concerned. Sounds great, so what are the cons?

My simplest reply is that the business, much like real estate, is viewed as solid, especially by the expected heirs, who expect to benefit from the profits, income and/or dividends it throws off, but very few members of the next generation ever consider the idea of selling pieces off in order to get their hands on the wealth.

Going back to the ice-water-steam analogy, here is how I think most of the senior generation members view this situation.

A business is solid, like a block of ice. If you can keep it in the freezer, it will last a long time, and it can even just sit there in a block, on a shelf. And you can even lock the freezer. Once it is liquid, you don’t have to keep it in the freezer anymore, and you can use it for more things.

But, it is also easy to spill, and you need some kind of a container to keep it in. And you need to beware of thirsty people coming by and asking for a sip. The related problem is that it is now subject to evaporation, one step closer to steam, and much more difficult to control.

The generation that is currently in control understands how easily it can disappear, and they struggle with how they can be sure that some of the wealth will be available to their grandchildren and future generations.

Keeping a family together around a business is one thing, keeping them together around money is much harder.