When things go right in a family business, it can lead to substantial wealth creation. On the surface, that’s a great thing — who wouldn’t want financial security and the ability to take care of friends and family?
However, as readers of this magazine know all too well, wealth can create as many problems as it solves. Sure, these are the good kinds of problems to have, and no family business leader would trade success for struggle. But to avoid the well-worn path of families who squander their fortune in a few generations, we need to get real about all of the implications that come with multigenerational wealth.
I’m a fourth-generation member of the Schmid family, which owns Crescent Electric Supply Company. Like many families in our situation, we grapple with the question of how and when to educate the next generation about their shareholder privileges and responsibilities. There’s a fine line to walk between ensuring younger family members understand how to manage money and making sure they aren’t spoiled by it.
A cautionary tale
Money was a taboo topic for me growing up. My brothers and I had all that we needed, but that didn’t stop us from trying to figure out how much money our parents had. We’d try to guess Dad’s salary based on the size of our house, the cars in the driveway and the kind of vacations we took. We never got an explicit warning not to ask about Dad’s income, but we knew better than to cross that line.
I didn’t even know I was a partial owner in our family business until I got to college. Crescent Electric was familiar to me as somewhere that many of my relatives worked, but I had no idea that our family was involved in it. When my mom called me up one day to explain that we were shareholders, it triggered an insatiable desire to learn more about the company.
As a finance major, I already knew what being a shareholder meant. The ins and outs of owning a piece of a private family business were new to me, but I generally understood that it came with certain privileges and responsibilities.
I also happened to be in the middle of my first finance course, during which we talked about the all-too-common story of an athlete going broke within a few years of retiring. The eye-popping salaries you see on ESPN quickly get eaten up by taxes, personal trainers, requests from family and friends, etc., my teacher explained. Without a plan for how to make their money last, the athletes didn’t stand a chance.
That idea stuck with me as I learned more about Crescent and my ownership in it. Even unimaginable sums of money can disappear in the span of a generation or two — Cornelius Vanderbilt amassed a fortune of $3 billion that had all but disappeared just 50 years after his death.
If you haven’t heard this story before, you can probably guess how it went. The Vanderbilt kids had millions of dollars dropped into their laps and lacked strategies for making it last. Instead of establishing a multigenerational legacy, the family saw its wealth disappear into a black hole of lavish parties and extravagant houses.
Hindsight is 20/20, but if the younger Vanderbilts had been raised on strong principles and given a solid financial education, they might’ve had billionaire heirs today.
When it comes to the case of the ill-fated Vanderbilts, Warren Buffett’s famous quote is particularly apt: “It’s good to learn from your mistakes. It’s better to learn from other people’s mistakes.”
The right time for the ‘money talk’
Figuring out how to talk to your kids about money isn’t easy. But that’s just one piece of the puzzle — there’s also the question of when to broach the topic. The kids need to be mature enough to handle the conversation responsibly. So, in many families, this conversation is pushed off as late as possible, sometimes into the kids’ late twenties or thirties.
But waiting too long can be perilous. If kids aren’t taught strong money habits and principles by their families while they are growing up, they may learn from less desirable sources.
I give my dad a lot of credit here. He used the snowball analogy to emphasize the power of compound interest to us at a young age — if given enough time to roll downhill, even a small snowball will become massive.
But compound interest isn’t intuitive, which is why it needs to be specifically taught. For instance, if you ask someone to calculate 7+7+7+7 is, that’s easy—it’s 24. Ask them to do the same for 7x7x7x7, and the limits of mental math become apparent (it’s 2,401).
Compound interest also requires patience. The aforementioned Buffett accumulated 99% of his net worth after his 65th birthday. In a time of short attention spans and instant gratification, playing the long game just isn’t as sexy as day trading or betting on crypto.
Parents struggling with when to have the “money talk” should think about how to introduce financial concepts like these to their kids without having to get into dollars and cents. Someone who has a foundational understanding of compound interest is far more equipped to responsibly handle large sums than someone who was never taught this concept.
Wealth stewardship
As I started to get more involved in Crescent through the Schmid Family Council, I learned a lot more about our founder, my great-grandfather Titus Schmid. The ups and downs in his career were a sobering reminder that Crescent’s survival was often up in the air.
It also reminded me that I wasn’t just a recipient of shares in Crescent — I was a steward of the company and the wealth that it generated. Just as my parents had passed on ownership to me, I would be responsible for passing it down to my kids one day. At the very least, that meant I had to make sure the wealth lasted until then.
This mindset shift may sound subtle, but to me, it was profound. Crescent could and should be an economic asset for my family, but I needed to make sure I invested the proceeds well and didn’t spend at a rate that outstripped its growth. It’s entirely possible to enjoy the benefits of Crescent ownership during my lifetime while making sure it lasts for my kids.
I also find that thinking of myself as a steward of Crescent alleviates a lot of the guilt that comes with inheriting an asset. I didn’t do anything to deserve my ownership stake — I just got lucky by being born into the right family. However, that luck comes with a responsibility to not squander my blessings.
Unfortunately, I don’t have a script for how to get this concept across to the next generation. That will depend on your unique family culture. But there is something that needs to be confronted head-on — values around scarcity, motivation and work ethic.
Motivation and work ethic
Some readers may be thinking, That all sounds great, but I still worry that giving my kids too much, too soon, or revealing their ownership level will destroy their desire to work hard. If there’s one worry that all wealthy parents share, it’s probably this one.
There’s certainly something to be said for the strong work ethic that comes from not having a safety net. But I think parents who worry about this should ask themselves some deeper questions. For instance: How would I define what a “good life” looks like for my kids? Do I want them to struggle as I had to?
Going back to our muse for this piece, Buffett famously said that he would leave his kids “enough to do anything, but not enough to do nothing.” The theme of this quote is more important than the financial specifics — actually finding that line is probably impossible. But it does capture what the ideal situation looks like: a NextGen finds a career or other pursuit that they’re fulfilled by. Their family enjoys the financial security that comes with business ownership, but they don’t let it define the trajectory of their life.
Easier said than done, I know. Some kids will just never get there, and parents have to accept that. At some point, whether the parents like it or not, the next generation will be the ones making decisions about what to do with what they own.
But, as with the concept of wealth stewardship, ingraining key principles early on can help set NextGens’ gaze in the right direction. “Follow your passion” is a cliché at this point and, in my opinion, not always the best advice. Instead, encourage your kids to try lots of different things, discover what they’re good at and find what they’re intrinsically motivated to work on.
This may sound very Gen Z of me, but even the concept of a career path rings hollow with younger generations. Job-hopping and career changes have become the norm, and plenty of kids don’t have the desire or capability to plan out a 40-year career before they can rent a car. Plus, the pressure to choose a field in which they’ll spend the rest of their lives can lead to decision paralysis.
As Dr. Meg Jay points out in her fantastic book “The Defining Decade,” what’s more important than choosing the perfect career is just picking a path and walking down it. Before becoming a full-time freelance writer, I started my working life as a finance analyst. I knew it wasn’t necessarily my calling, but the job provided an opportunity to rotate through different departments and learn a lot. The knowledge I gained has been invaluable in my life and career thus far.
Many family leaders are tempted to create a sense of faux scarcity to motivate their kids. Not having a safety net lit a fire under my rear, they think, and I became successful, so my kids need the same thing. I’m not going to say this never works, but I’ve seen plenty of cases in which kids resent this idea and become reckless with money once they’re at the wheel.
Instead, I believe it’s much more effective to focus on fostering a sense of purpose and responsibility in your children. Then, let the chips fall where they may.
Control what you can
If there’s one thing you take away from this piece, let it be this: Most of your legacy will be out of your control. Once you’re gone, the decisions your children and grandchildren make will ultimately decide the fate of the family business.
So, focus on what you can control. That is, instilling the right principles in your kids, giving them a solid financial education and not pressing on them so hard that they have the desire to rebel.