Maximillian Gehrmann: How to lose the family wealth

There’s a very good reason why Maximillian Gehrmann feels an affinity for a famous quote from Germany’s first-ever chancellor Otto von Bismarck: “The first generation earns the money, the second manages the wealth, the third studies history of art, and the fourth degenerates completely.”

Hailing from a 16th-Century Prussian family who have made – and lost – vast wealth through multiple global historical events, Gehrmann understands all too well the truism of “Shirtsleeves to shirtsleeves in three generations”.

His great-grandfather made a fortune during the First World War only to have most of it stripped away following Germany’s decline during the 1920s – especially after the Treaty of Versailles and the subsequent hyper-inflation. Having rebuilt the family business back up again, the Second World War saw history repeating itself. But then post-war opportunity came in the shape of a hugely successful architectural career passed down to his grandfather that helped to rebuild much of the country’s devasted infrastructure. These renewed fortunes, however, were depleted once again with a series of bad financial decisions and interfamilial fallouts.

Now a success story in his own right with a series of savvy equity, debt, and mezzanine funds and a host of industrial projects, real estate developments and start-ups under his belt, Gehrmann discusses the main reasons a family business can fail…

Make the wrong financial decisions
A few years ago, I dug deep into my family archive and discovered a lot of information that was thought lost between generations. A lot of the paperwork explained why money has been lost over the years.

For example, a lot of the property my grandfather had in the 1960s and 1970s was sold off one at a time when somebody needed money. This approach wasn’t well managed. It wasn’t like going to the cash machine and drawing some funds out, there were no efforts to rebuild investment assets than rather consume or have liquidity for the employees.

For my grandfather, his financial decisions were always about the company first. So, when the company had needed funds, he didn't lay off staff, he would rather get into his personal money and insert it into the company just to keep things going.

It was not a sustainable basis of thought. There were no succession or governance plans put in place, there was just a lot of living for the moment. You may want to enjoy the money, which is fair enough, but you need to ensure that the family wealth can be managed and continued. The correct financial decision should be that it’s the family businesses first and everything else is decided on after.
 

You need to be open and talk about a proper governance plan.

Have a lack of vision
Of course, there have been moments throughout my family’s history where forces beyond anybody’s control affected or even destroyed the business – the First and Second World War, for example! – but having a lack of vision can take down even the most established business.

Many businesses have family charters, where you're all tied into the same vision, but people are individuals – some people want to enjoy a lavish lifestyle, others want to have children, or not, for example – so it’s very important to have a clear plan that allows for everybody to be happy. It’s a lot of work to get this right but it’s so important.

This lack of vision was a problem for my grandfather and father, who didn’t want to get into the business, he didn’t want to be an architect. If everyone did what their parents wanted them to do without thinking about what makes them happy, that would be stupid. We can’t just ignore all our different capabilities. So, the same theme repeated itself with my cousins, who in turn did not want to, or could not, continue the business my uncle took over from my grandfather.

So, you need to be open and talk about a proper governance plan, so everyone knows what’s expected of them and their role in the family and family business. It’s all about synchronising wishes for everyone.
 

Poorly prepared succession plans
When my father stepped away from the business to study philosophy and theatre, my uncle took over much of the running of family matters. Because there were no proper succession plans when my grandfather retired and eventually passed away, my father and uncle’s relationship devolved into a lot of small conflicts.

Neither could really make any big financial decisions without the other person’s say-so, but they were sort of independent in their daily lives.

When my father passed away in 2006, I was 19 at the time and I inherited the problems he had with my uncle. My uncle wanted to enjoy his life and seemed increasingly overcome with the asset management.

He continued to operate the business like he did in the 1960 and 1970s – I never saw a computer on his desk! – but it seemed so outdated and old fashioned that he just got overrun by younger modern competition. You can't surf on your old wave of success forever, at some point it's over and you must look for a new wave again.

He didn't manage to set up a succession plan with anyone from his family or anybody he employed. There was a bad succession management and it left things very confused and difficult for everyone left to deal with. Also, the right time to sell the company in the 1970s and 1980s was missed.
 

Breakdown of communication and trust
The initial breakdown of trust between my father and uncle began when they prepared for inheritance when my grandfather retired in the 1980s.

The conflict derived out of that because of the muddled allocation of assets. Thus, valuable ancillary areas of the office properties were not taken into account. My uncle hoped my father wouldn't notice and that led to the initial breakdown of trust.

In relation to the rest of the inheritance, it wasn’t a major thing, but it led to a lot of bad feeling. There was trust in the family for decades but when it came to the point of dividing wealth, there were these dirty little tricks just to get some extra funds. Why do you need to do this? 

I think this breakdown of communication and trust is a multi-level, highly emotional topic. To ensure family relationships survive and flourish, there needs to be always complete transparency.