You know something’s a big deal when it gets a formal name. So it is with what’s now generally referred to as the “Great Wealth Transfer.”
This unprecedented economic phenomenon will impact some of us directly, but its far-reaching effects on our economy will touch every one of us. At the epicenter of change will be family business owners. It is critical for different generations in those families to understand the phenomenon’s implications and position themselves to benefit from them.
Let’s start with the mind-boggling numbers. According to a 2018 report by Cerulli Associates, 45 million U.S. households will transfer $68 trillion in wealth over the next 25 years, with the vast majority going to their heirs – equivalent to 80% of 2018 global GDP. Nearly $9 trillion, or almost half of U.S. GDP, will be transferred in the next 7 years alone. While Gen X is forecast initially to be the biggest beneficiaries, millennials will not be far behind.
This vast flow of capital will be complemented by two mega-trends: digitization, which is being accelerated by the current COVID-19 pandemic, and climate change. Millennials are the first generation of “digital natives” and the first to see climate change for the existential threat it is. They’re already shaping the debate on both and influencing older generations, as evidenced by the recent growth of ESG tools and offerings.
As millennials’ wealth quintuples by 2030 and they rise to leadership positions, they will want to build the companies and infrastructure to capitalize on digitization and find economically profitable solutions to climate change.
This will cause tensions with the “old ways of doing things,” especially at family-owned businesses. At Brightstar Capital Partners, we consistently work with families and see this inter-generational debate play out. According to a recent Deloitte Family Business Survey, just over 1/3 of families agree that business objectives align with family goals, less than 1/3 fully agree about the future development of the business, and exactly 1/3 would already be willing to give up control of the family business. This is a complex dynamic, but it leaves families with three fundamental options.
- Retain full business ownership, create internal processes to drive alignment with family goals. This is the hardest option, as the new leadership will have to overcome significant inertia and anchoring to “the old ways.” Both academic and anecdotal research are full of examples where leadership was passed on, only to be reclaimed by the older generation when change became too radical.
- Retain (full or partial) ownership, bring in outside help to drive alignment with family goals. This has the advantage of outside management sending a clear message of change, particularly when it comes with additional capital. But even in this option, many examples exist where “the old ways” eventually reassert themselves.
- Sell the business (fully or partially), and realize the family goals outside of the business (e.g., via a family foundation or a family office that makes active investments). This has the advantage of separating family goals from the business, treating it as a purely economic endeavor. However, it is not an automatic winner, as many family businesses derive economic and competitive advantage from being run with a long-term mindset that embodies the family’s values. Many businesses suffered when the new owners unintentionally destroyed the ‘secret sauce’ that family ownership brought.
Looking at those options, two conclusions come readily to mind. First, the historic transfer of wealth will be complemented by an equally historic number of family businesses that will invite outside owners and managers to help move the business forward. This explains why middle market private equity continues to thrive, and deal volumes grew by nearly 70% in the last five years.
Second, any new owners must maintain a close collaborative relationship with the family to ensure the future success of the business. The new leadership must study and adapt that ‘secret sauce’ to understand the interaction and synergy between family values and business operations that made the business thrive in the first place.
This is not a space for cookie cutter solutions learned in the latest business school classes. Family businesses operate in a complex web of interactions with a wide ecosystem, including their local communities. New owners who fail to understand this, will destroy more than just EBITDA.
There are no easy answers, and each family will rightfully choose its own path – but I am optimistic. The innovation and new thinking brought by new generations, complemented by a supportive ecosystem of new managers and capital providers, will result in an even stronger set of companies over the next decade. By incorporating the ESG principles that millennials have already brought to the forefront, those companies will undoubtedly improve the world in addition to delivering returns. And that is a silver lining indeed!