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Breaking the Cycle: Why Family Businesses Often Face the "Shirtsleeves to Shirtsleeves" Challenge

Posted by Scott Lynett, Esq. | Nov 17, 2023 | 0 Comments

Have you ever heard the saying, "Shirtsleeves to shirtsleeves in three generations"? It's a popular phrase in business, especially among family-owned companies. It suggests that family wealth often disappears by the third generation. The first generation makes the money, the second enjoys it, and by the time the third comes around, the fortune has dwindled, and it's back to square one – or back to shirtsleeves.

But why does this happen? And more importantly, how can it be prevented? Let's dive into this intriguing phenomenon.

 The First Generation: The Builders

The first generation in a family business is usually the founders. They are the hard workers, the innovators, and the risk-takers. They start from scratch, sometimes literally with just the shirts on their backs (hence the "shirtsleeves"), and build a successful business through sheer determination and grit. They know the value of a dollar because they've had to earn every single one.

 The Second Generation: The Maintainers

Then comes the second generation. These are the kids who grew up seeing their parents work hard. They often join the family business, bringing new ideas and education. They tend to focus on maintaining and growing the legacy they've inherited. This generation usually still understands the struggle and effort it took to build the business, so they often maintain the respect for hard work and money management instilled by their parents.

 The Third Generation: The Challenge

The third generation, however, faces different challenges. They're typically more removed from the struggles of the founding generation. They might not have seen the same struggles or learned the same lessons about money and hard work. Sometimes, this can lead to a sense of entitlement or a lack of understanding of the value of money and the effort it takes to earn and maintain wealth.

 So, How Do We Break the Cycle?

  1. Education and Exposure: It's crucial for the founding generation to educate the younger generations about the business, the value of money, and the effort it took to build the empire. Letting kids and grandkids see the work that goes into running the business can instill a sense of responsibility and understanding.
  2. Encourage Work Outside the Family Business: Before joining the family business, it's a great idea for the younger generations to gain experience and skills elsewhere. This outside work experience can teach them new perspectives and the value of hard work, helping to avoid a sense of entitlement.
  3. Instill Financial Responsibility: Teaching the next generations how to manage money responsibly is key. This can be done through involvement in financial decisions, understanding investments, and learning about the risks and rewards of running a business.
  4. Foster a Culture of Innovation: Encourage each generation to bring new ideas to the table. This keeps the business evolving and avoids stagnation, ensuring each generation feels like they are contributing something unique and valuable.
  5. Succession Planning: It's essential to have a clear, fair plan for how the business will be handed over to the next generation. This process should involve training and gradual transfer of responsibilities, so the transition is smooth and the business stays strong.

 The Emotional Side

Managing a family business isn't just about the financial and operational sides; there's a huge emotional component too. Relationships can be complicated when family and business mix. It's important to establish clear communication, where business decisions are made for the good of the company, not just family members. Sometimes, hiring outside professionals to manage some aspects of the business or advise on family dynamics can be incredibly helpful.

 In Conclusion

"Shirtsleeves to shirtsleeves in three generations" doesn't have to be an inevitable fate for family businesses. The Law Office of Scott Lynett has decades of experience working with family business owners. With the right planning, education, and mindset, it's possible not just to maintain but grow the family legacy. Breaking the cycle is about preparing each generation to be responsible, innovative, and committed to the business's long-term success. It's a challenging journey, but one filled with opportunities to build something that lasts much longer than three generations. Let's roll up our sleeves and get to work! Call 570-468-7603 or use the link below to get started.

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