Shirtsleeves to shirtsleeves in three generations.?

This time-worn phrase represents a classic progression: from the creator(s) of the wealth who wears shirtsleeves (rather than a business suit), works hard and lives frugally; to his/her children, who study at university, wear fashionable clothes and live in good style; to his/her grandchildren, who grow up in wealth and do not work, but spend all the money. So the fourth generation, again in ?shirtsleeves,? must go back to work to rebuild what the third generation spent.

These are the statements from an article by Charlie Collier, Senior Philanthropic Advisor for Harvard University, and Dan Rice, the National Director of Gift Planning for World Vision. But globally, estate and trust planners, investment advisors, accountants, and legal teams all know only too well the effects of not planning adequately for transitioning assets, particularly family businesses, to the next generation.

Building a business from the ground up for families is incredibly hard work, a labour of love, a completion-of-identity trip (my father, for instance, was always known as ?the sewing machine man?), a positive force within a community and in most cases, a complete affirmation of self-fulfilling goals. Social mores have changed enough that I had to edit the shirtsleeve statement to include a female. For in truth, most family businesses have been successful through the efforts of both spouses, not just the he component. And in another of life?s harsh realities, more than most realise, the second growth phase of family business is achieved by the efforts of the mother because the father has tragically passed all too prematurely.

Small businesses are also unique in other ways. While providing a completely adequate living for all related family affiliates, they often never had sufficient surplus resources to establish decent pension structures. Even now, intergenerational families pitch in together to ?keep the store running?, often at lower than par wages or no wages at all, for years at a time. Small businesses built their revenue and volume on the good name of the owners. Take the same business without those unique personalities continuing to provide that well-earned reputation for service, what have you got? In many cases, not much. Doing business with the business was done because of the experience; the owners made you feel good about purchasing something from them.

Businesses run by family members can be streamlined beauties or the source of constant conflict. So much will depend upon the style of leadership of the first generation entrepreneurs. How will they structure steps on relieving command? Can they hand off control and accountability and let the second generation make their own mistakes? Time after time, Elder families have sent the Youngers off for fine educations up and through Master degrees, only to deny them any real decision accountability upon return home. Youngers, impatient with the transfer of responsibility process, may lose interest or decide that there are easier ways to make their own fortune. A very few manage to work out a sensible division of labour and intellect, and then start on the road to full divestiture. A classic case, astoundingly successful, was the evolution of the Wal-Mart Corporation started by Sam Walton. From the time his children could read, he involved them in the running (and share ownership) of his life?s dream. Consequently, even long before his death, his children had major roles (and great wealth) in the continued operations of the company. He died prematurely for a man of great vision. We can only speculate if he would have stepped away completely from holding the reins, if he had remained in good health.

Many other families stall out somewhere in between, the older generation knowing they must cede control and simply unable to do so. The Youngers exhausted from demonstrating good faith.

At some point, though, the family business either reaches a mature stage primed for significant expansion, or the current owners have already started down the staircase of retirement. Either avenue becomes a pressing issue to preserve value and customers who will fund the transition. For without continued success of operation, nothing will remain in rather quick order.

So the decisions condense down to two. Sell out to a complete stranger and walk away, or structure a settlement sale to the next generation.

It is difficult to value (and to sell) a small business. Ideally, the owners want to pass their life?s work down to the next generation, easier said than done. And yet, because they have put everything, literally, into the business growth, they must realise a return on their initial investment if they are to retire with any dignity at all.

So, how do you structure an internal business sale? For that matter, since that component is only one part of a family?s assets, how do you responsibly transfer any significant assets to the next generation?

What are the most common mistakes (there are many) families make trying to accomplish this goal? Can the elder generation give up control? To be successful, must ceding control have to happen? Yes, almost always! Can the younger generation have the patience to wait while their older relatives struggle with not only passing on their business, but their identity, and their purpose in life? Strong emotions, sense of loss and control, sense of completion, honest communication and real money all come into play. What happens if the younger generation cannot succeed and the business along with mom and pop?s retirement fail with it? And what happens if the patriarch (or the matriarch) passes before any plans are in place? Is there any family left after all these events take place?

Next week, we look at some composite cases of what (and what not to do) with intergenerational transfer of family businesses and assets.

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Martha Harris Myron CPA/PFS CFP? is a VP and Senior Private Banker, Private Client Services, Bank of Bermuda Member HSBC Group. She specialises in providing comprehensive financial solutions for individuals and their families.

She can be reached at Confidential email can be directed to marthamyronnorthrock.bm