Do most family businesses really fail by the third generation?

Do most family businesses really fail by the third generation?

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If you’re a fan of the HBO show InheritanceOr if you’re aware of public and permanent conflicts between some of the most visible family businesses in the world — think about it. Murdoch Or Sumner Redstone Family — Family business may seem more vulnerable than other forms of business. Indeed, that is conventional knowledge. Many articles and speeches about the family business today include references to the “three generation rules.”

But that perception could not be far from the truth. On average, the data suggest that family businesses last much longer than typical businesses.In fact, today they dominate most lists of The longest-lasting company in the world, and They are A good position to maintain competitiveness for 21 yearsNS Century economy..

Single study, decades ago

Where did the three generations of ideas come from? 1980s single Research Of a manufacturing company in Illinois. That study is the basis of most of the facts cited about the longevity of the family business. Researchers took a sample of the companies and tried to identify the companies that were still doing business during the study period. Next, we group the companies into blocks of 30 years, roughly representing generations. In this survey, only one-third of family businesses passed the second generation and only 13% passed the third generation.

Some findings on the study:

First, its key findings are often misrepresented.Many explain the results and say that only one-third of the family business has achieved it. To Second generation.But research says that one-third actually make it Use The end of the second generation, or 60 years. Choose your words carefully, as it’s a 30-year difference in business life!

Second, the survey doesn’t say how it compares to other types of businesses. A Research Of the 25,000 IPOs from 1950 to 2009, we found that on average it didn’t last for about 15 years, or even a generation. father, S & P 500 holding period is shortened.. If the average company joined the index in 1958, it would stay there for 61 years. By 2012, average tenure had been reduced to 18 years.Boston Consulting Group analysis In 2015, we found that US public companies faced 32% “exit risk” over a five-year period. This means that almost one-third will disappear in the next five years. The risk is 5% risk What the public company faced in 1965.

Finally, the survey does not provide insight into why some companies have disappeared. Family conflicts and business problems have certainly hurt some of them, but in other cases the owner may simply have sold their business and started a new one. It’s far from a “failure”.

3 generations of myths

There are many versions of the three generations of mythology. It underlies the phrase “from shirt sleeve to shirt sleeve,” suggesting that the money earned by an entrepreneurial generation is gone by the time of his grandchildren. It’s also a Brazilian saying. Noble son; poor grandson. Many countries have several versions of that saying.

The myths of the third generation are so widespread that they can be self-fulfilling prophecies for families who believe that the potential for long-term success is piled up against them. That’s almost what happened to one successful business family we advised, and from members of the Independent Board, they wanted to ensure the survival of their business. Absent We will pass it on to the next generation.

The brothers were deeply concerned about their business and the people who worked there. They also highly valued the idea of ​​leaving the business as a family heritage rather than cashing it out and making money for the next generation. So when they were ready to retire, they agonized over whether to sell their business to their longtime non-family business or pass ownership to the next generation. With the advice of board members, they believed that they had to choose between making the company last longer or keeping it with their families. However, they felt this was the wrong choice and decided to try family ownership.

It was a wise move. The brothers are on track to transfer ownership to the next generation, and the business is thriving with the help of non-family owners who are bridging the gap between retired owners and their successors.

So is there anything in the 3rd generation myth? Sure, some families go from rags to wealth and come back, but on average they don’t. Those who climb the top of the wealth ladder tend to stay there longer. Gregory Clark, an economist at the University of California, Davis, found it when he took a major action. Research on social mobility Beyond Generations: Rich families usually remain rich and poor families remain poor. Eventually there is a regression to the mean, but “this process can take 10 to 15 generations (300 to 450 years),” he writes.Similarly, the Bank of Italy economist Study tax records in Florence in 1427 and 2011, They found that today’s top earners were “already at the top of the socio-economic ladder six centuries ago.”

In short, if your family business fails, you rarely have to worry about the wealth it produces for you evaporating.

Think by generation, not quarter

The longevity of the family business is important not only for the owner but also for the economy. According to the US Census Bureau, family-owned businesses (those in which two or more families exercise control at the same time or in sequence) are typical. About 90% of American companies.. From the partnership of two people Fortune 500 Companies, these businesses account for half of the country’s employment and half of the US Gross National Product.

Can the family business remain a major source of employment nationwide? Globally In the long run? The answer is yes.

The reason is the choice they make. Family businesses tend to think from a generational perspective, rather than being obsessed with achieving their quarterly revenue goals like listed companies, and can take action to withstand the tough times.

For example, the New Orleans-based Robinson Lumber Company, founded in 1893, is now owned and managed by the fifth generation of its founders. At the heart of their success is a way of doing business that prioritizes long-term survival over short-term profits. The company sells a combination of wood products that makes no sense to integrate into one business if the company is set up from scratch. Species, colors, and other trends are trend-dependent over the years. As a result, some of the company’s products usually work, while others do not. At that point, it may be most beneficial to abandon unpopular products and favor current performers, but doing so risks making the company irrelevant when preferences change again.

Also, like many family businesses, Robinson lumber does not borrow much from banks. Debt is a great way to fund growth and goose return on equity, but it also puts the company at risk during the inevitable recession of the economy. Family-owned businesses last longer because they can pay the prices that longevity requires.

A bright future after a pandemic

Compared to widely held public companies, family businesses tend to thrive when: The times are getting tougher.. The pandemic provided evidence of this. Few companies are unaffected by the pandemic challenges, but family-owned companies appear to be emerging better than their competitors.

In December 2020, we Research Family-owned businesses around the world (140 respondents from five continents representing more than 25 industries) have not only experienced the worst weathering, but are hoping to land in the coming months. He showed an optimistic view. 68% of those surveyed believe that they will be able to operate more efficiently when the pandemic is over. And more than half believe that there are new business opportunities, more efficient decision-making processes, and learning opportunities for the next generation. Even at the height of the pandemic, 25% of those surveyed believed that market share would not only survive, but would increase over the next few years.

Family ownership provides a competitive advantage in situations that require resilience rather than rapid growth. A family-owned business whose owner is close to a business can quickly adapt to changing situations and balance the essentials and long-term implications of surviving the current crisis. That means working hard not only to save cash, but also to ensure the well-being of our employees and the community.Among many the studyFamily-owned companies have been shown to be better employers and community citizens than non-family-owned peers. This is a clear competitive advantage and best represents capitalism.

Editor’s Note: Updated this article to clarify the survey on longevity in the family business.

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