The Single Biggest Threat to Your Wealth

From shirtsleeves to shirtsleeves
in three generations.

—English proverb

The single biggest threat to your business or wealth is not your competitors, the tax man, or the economy. It is the people you love. Decisions by second and third generation heirs are why families go “from shirtsleeves to shirtsleeves in three generations.”

The “shirtsleeves” phenomenon is well known and cuts across cultures. The first generation achieves success through hard work, the second enjoys the fruits of that labor, and the third must start all over.

Why Families Fail

In the late 1990s, researchers identified the main reasons for successful and failed intergenerational family-business transitions. Their 1997 paper[1] concluded that:

  • Problems in relationships among family members were the key factor in 60 percent of failures
  • Heirs not being sufficiently prepared were the key factor in 25 percent
  • Planning and control issues were the key factor in 10 percent (other factors accounted for the remaining 5 percent)

Difficult relationships and unprepared heirs are key factors in a total of 85 percent of failed family business transitions because families tend to ignore these problems. Based on our experience, most allocate 80 to 100 percent of their succession and estate planning efforts to financial and tax planning.

Yet for a family with a business, the key issues are: who will own the business, who will make decisions regarding it, and how they will make them.

Key issues for families without a business include future control of the assets (particularly over investment and withdrawal decisions), uses to which the money will be put, protection of assets from future creditors, and preservation of wealth for future generations.

Family governance is an essential mechanism for addressing these issues.


[1] “Correlates of Success in Family Business Transitions” by Michael H. Morris, Roy O. Williams, Jeffrey A. Allen, and Ramon A. Aliva, Journal of Business Venturing 12, pages 315-401, 1997 Elsevier Science Inc. New York