Surviving The ‘Shirtsleeves-To-Shirtsleeves’ Curse

Every culture has their own saying describing “shirtsleeves to shirtsleeves in three generations.” Why is there a natural tendency for families to lose their wealth over generations?

Here are a few key reasons:

• Families do not have the optimal strategy for allocating their capital for growing the overall family wealth, including an objective plan for the core business based on industrial life cycle and competitive landscape;
• Families lose their ability to make sound business decisions to grow their wealth in later generations. Part of this may be the result of owners becoming more distant from the management of their wealth;
• Lifestyle expectations of family members increase. This results in increase of consumption, which decrease the level of capital that can be used to generate more wealth over time;
• Family members grow exponentially, faster than the growth of wealth over generations. Therefore, the per capita wealth tends to decline. (Note: this may not be as big an issue in certain countries such as China where government restrictions on child births limit the rate of family growth from generation to generation)

In order to keep families financially alive, the business family needs to grow family assets at a greater rate than the family or its business or other activities are consuming them. Consumption of family assets happens in different ways:

• Core business activities/investments that lose money
• New investments where some bets pay off, while others don’t
• Ownership splits among family owners and divorces that reduce investable assets
• Family activities and expenses that don’t produce financial returns

Therefore, in order to sustain and keep growing their wealth, business families need to make one or a few large bets with prudent risks in order to grow their wealth in every generation. Figure A shows the three general paths that family wealth travels over time from generation to generation. The ideal path is for families to regenerate their wealth in every generation, where they create a new source of generating significant wealth. The second is the shirtsleeve path where family members do not take huge risks with their assets, but wealth dissipates over time with consumption and growth of the size of the family group without new sources to replenish it. The last is the quick descent path where families make big bets in risky ventures and lose their family fortune.

For a business family to be on the wealth regeneration path is not easy. In order to achieve this, the family needs at least one wealth generator in every generation. Furthermore, there are hard choices that need to be made about how family members would work together, how to manage the family wealth, how much to be managed collectively and individually, what sacrifices family members are willing to make in their lifestyle in order to put capital to work in generating more wealth. Families need to focus on three areas simultaneously in order to be successful: (1) Develop sound asset growth strategies; (2) Maintain unity within the family; and (3) Focus on developing talent, both family and non-family.