Many business families are facing a new reality in terms of how they create wealth and allocate their capital. After a lifetime of having the family’s wealth almost entirely bound up in their business, business families are recognizing that they need to de-risk and diversify their wealth in today’s more volatile and unpredictable environment.
Business families are facing a new wealth creation and capital allocation reality.
How might families and their businesses define their future wealth?
A new era of asset allocation
The concept of capital and how it is allocated in family businesses is evolving. It not only includes the tangible assets of the business, but the family’s human and social capital as well.
Protecting financial capital
With the recent economic headwinds, financial capital strategies are being driven by the need to de-risk the family’s wealth.
Growing human capital
Transferring the knowledge and experience of current generations and encouraging the innovations of next-generation family members are vital for maintaining and growing the family’s human capital.
Recognizing the power of social capital assets
Family-owned companies understand that they often have a strong public presence and an important social responsibility, making the careful management of their social capital assets a reputational and competitive priority.
Building and passing on multi-generational wealth
Current family business leaders are increasingly recognizing and accepting that not all upcoming generations of their family will necessarily have an interest in being directly involved in the legacy business. Many next-generation family members are seeking ways to create their own independent wealth – and, in some business families, this is being viewed as a new strategic financial diversification opportunity.
Families are prioritizing funding new ideas and ventures of the next generation, which assist with the diversification strategy.
Leveraging human capital
The family itself, and its purpose and values, is one of the largest and most influential human capital assets. It represents the socioemotional wealth that is associated with being part of a family in business. And continuing to build and leverage the family’s intellectual capital contributes directly to the preservation of the family’s entrepreneurial spirit and the founder’s legacy.
As Millennial and GenZ family members enter the workforce, it’s possible that the family business may not always be their right fit. However, it is still possible and important to pass along the entrepreneurial spirit of the family to each successive generation, without necessarily transferring the control and management of the business.
Brand and reputation – powerful social capital assets
Large, publicly prominent family businesses have always taken great care to maintain a positive profile with all their key stakeholders, including relevant tax authorities. As good corporate citizens, business families would never take advantage of opportunistic tax opportunities if their actions could be construed as inappropriate or questionable in the eyes of their customers, employees or community members. They aren’t willing to risk the impact that such actions may have on their reputation and the potential damage to the trust in their brand if people began to view their family and company in a different — and potentially negative — light.
As good corporate citizens, family businesses have an opportunity to achieve an above-average rate of return on all their long-term investments by reviewing how they allocate their financial, human and social capital.
Will the next generation of families in business redefine the meaning of wealth?
Even though not all family members will want to work in the family business, it doesn’t mean that family members who are not in the business will disengage from the business. The family is the glue that binds, and family members will continue to care about what matters most to the family and measure their wealth in that way. This includes the legacy they have inherited, and the need to allocate all of their available financial, human and social capital carefully to deliver value to the family as well as its customers, employees, communities and society at large.
This article is part of a series from KPMG Private Enterprise exploring how family businesses are adopting new ways of thinking and driving innovations that are preparing their businesses and their families for future opportunities. The articles provide practical examples of how family businesses are keeping their minds open and turning emerging trends into the drivers of their future growth and success.
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Klaus Rytz
Chair of the Board and Partner
KPMG in Denmark
