How to make the family business last for generations

Wealth. It can mean a lot of things. Whether it's owning a big company or starting a small, family business, you want to manage how you hand down that family legacy. But there's a trend that goes back centuries. By the time the third generation comes around, it fizzles. 

Let’s say you started a plumbing company. It is doing well. And as you hoped, your adult children come to work for you, and they take over the family business. You are handing down family wealth - your legacy. Now, you might suppose that the next generation then takes over after that. But that’s not generally how it works out. 

Consider these Asian proverbs: Wealth never survives three generations. And this one: The third generation ruins the house. And modern-day data bears this out. 

The statistics on family-owned business look like this: 30 percent survive to go to the second generation. Only 12 percent make it to the next generation. By the time the fourth generation comes along, that number plummets to four percent. 

What goes wrong? Two local money managers wrote a book about this very topic called "First Generation Wealth." And they offer three guiding principles for keeping the family legacy alive. Robert Balentine from his self-named company explains what happens to take the hard-earned family from stalls to stars to stalls again.

"We want our children to have it better than how we had it. We walked five miles in the snow to get to school in the morning, you're riding the bus, the next generation is in a carpool, and then somebody shows up in a chauffeur-driven limousine," Balentine says.

What happens is that first generation has rolled up the shirtsleeves and worked countless hours to create a business. The second generation sees that hard work and knows what it takes. But, life was easier for them because their parents had accrued some wealth. By the time the third generation arrives, too often they have no idea what it took to create the family business from the ground up. But they do know how to spend the money. 

Balentine says in his book parents need to let young people fail.

"I think particularly in this day and age of helicopter parenting, we will always try and rescue our children, and we don’t allow them to fail. And when we don’t allow our children to fail, they’re not prepared for life," he said.

Here are three tips for beating the third generation curse. Teach your child about money in age-appropriate ways starting as a toddler. Keep the lines of communication open throughout life about expectations and how to make a business work. Make sure everyone is living below their means. Whether you make $2 million dollars year or $50,000, the rule is the same. 

And first gen this is for you. Don’t force your children to follow your path. 

"It's important to understand that maybe your children don't want to work as hard as you do. And that is not to say they want to be lazy, but maybe they're not as driven," Balentine said. "And maybe they want to enjoy their families more and be home for dinner, as opposed to the first generation wealth creator and that's OK." 

Another mistake he says parents tend to make is to use the family business as leverage to get children to go into the careers the parent want, or to marry a certain person. That is a sure recipe for disaster, he says. 

This advice applies to all of us - wealthy, middle class, and working class. Anyone at any income level can spoil their children. 

You can buy the book right here: "First Generation Wealth."