A common discipline that high net-worth individuals share when building and sustaining wealth for future generations is the appreciation for entrepreneurship.
This is also true for almost every wealth management strategy, says Eric Enslin, CEO of FNB Private Wealth and RMB Private Bank.
“For families who have already made their fortunes, emphasis is often placed on passing on legacies to a younger generation of leaders who will be responsible for breathing new life to well established corporations or scaling high growth potential businesses to new levels of growth,” said Enslin.
“When executed correctly, the model and principles can be replicated across multiple generations.”
Wealthy families abide by four common principles when using entrepreneurship to build prosperity, the wealth manager said.
Building a saleable asset
The challenge is usually not attracting investors to raise capital in order to start a business, but rather leveraging available funds and intellectual capital to build a profitable venture that can be sold for a premium, said Enslin.
“Many wealthy families go into business with an end goal in mind, either to sell the business for a return, raise money through mergers and acquisitions, list the company publicly or pass it on to future generations.”
“The business is often started with an exit strategy already formulated.”
By having a stake across an entire value and supply chain of a particular industry, these entrepreneurs are able to diversity and overcome short term issues that may severely impact profit margins, said Enslin.
“For example, wealthy families in the commercial farming industry were more resilient to the recent drought conditions that impacted the whole country, through their exposure to the entire farming value chain.”
Long term potential
“Through experience these families understand that wealth cannot be built overnight and it may take years or even decades before a venture accumulates returns.”
“Unlike some SMEs, who may use entrepreneurship for instant gratification, making ends-meet or gaining financial freedom, wealthy families use businesses to leave a legacy,” he said.
According to a study published by the Williams Group wealth consultancy in 2015, 70% and 90% of wealthy families lose their wealth by the second and third generation, respectively.
Notwithstanding the appreciation for risk taking in entrepreneurship, proper due diligence should take precedence before any business venture is pursued, said Enslin.
“As the old adage goes ‘with great power comes great responsibility’ – successful heirs appreciate the responsibility that comes with inheriting and sustaining wealth, as well as risk of it diminishing over time.”