Family businesses have long been a cornerstone of the global economy, often starting as small ventures and growing into significant enterprises that contribute to the community and beyond. However, the adage "shirtsleeves to shirtsleeves in three generations" has proven to be more than just folklore. Statistical evidence1 supports the notion that with each passing generation, the likelihood of sustaining a family business diminishes. But why is it that each generation finds it harder to maintain and grow the success of the previous one?
The Statistical Reality
The Score.org Study indicates a stark decline in the survival rates of family businesses across generations. When I first started my business advising journey, this was one of the notions that stood out the most to me. Maybe it was because my father was a business owner and/or maybe it was due to the fact that this reality was utterly surprising to me. I was shocked, especially when I saw the numbers.
According to the Family Business Institute, about 30% of family-owned businesses survive into the second generation, 12% into the third generation, and only about 3% into the fourth generation and beyond1. These statistics reveal a daunting challenge for those at the helm of family enterprises. But what drives this generational decline?
The Founding Generation: Passion and Innovation
The first generation, often referred to as the “founding generation”, is typically driven by a powerful combination of passion, innovation, and necessity. The founders usually start the business from scratch, with little to lose and everything to gain. Their personal and financial stakes are high, and their vision is clear. This generation is marked by a strong work ethic and a deep personal connection to the business, which often results in significant early success. Blood, sweat, and focus.
However, this success and discipline can come with a price. The founders may become so ingrained in every aspect of their business that they find it difficult to delegate or plan for their succession effectively. This lack of preparation sets the stage for difficulties when the next generation is ready to steer the ship.
The Second Generation: Stewardship and Stabilization
The second generation inherits a business that, while established, is often heavily reliant on the founders' vision and methods. This generation’s role is typically seen as one of stewardship, maintaining the business’s success rather than drastically changing, evolving, or growing it. The challenge identified here is balancing the need to respect the founder's legacy while also adapting to new market realities.
Statistics show that only 30% of family businesses survive this transition. The reasons are multifaceted: sibling differences, lack of preparation, and combative visions for the business's future can all contribute to its decline. The second generation may lack the entrepreneurial drive that fueled the business’s initial success, leading to stagnation and/or mismanagement.
The Third Generation: Dilution of Leadership and Vision
By the third generation, the challenges intensify. With more family members potentially involved, leadership can become diluted. Decision-making processes often become more complex, and conflicts over the direction of the business can arise. Additionally, the third generation may feel less connected to the original vision of the company, as they are further removed from the founding story and may not have experienced the same struggles. It is common that, with each subsequent generation, the purpose and passion of the business is gradually diluted out of their DNA.
The Family Business Institute’s research reveals that only 12% of family businesses survive into the third generation. This generation often faces the dual challenges of keeping the business relevant in a rapidly changing market while also managing family dynamics that can hinder effective decision-making.
The Fourth Generation and Beyond: The Rarity of Longevity
Surviving into the fourth generation is an exceptional achievement with only 3% of family businesses accomplishing this feat. By this point, the business must navigate an increasingly complex landscape of family interests, more people are involved, new market challenges surface, and competition has increased. The original values and vision of the business may have been diluted or lost entirely, making it difficult to maintain the same level of success and determination.
At this stage, the businesses surviving often have one thing in common - they have professionalized their internal infrastructure and often bring in outside management to ensure that the business is operating effectively. It is important to function without being overly influenced by family dynamics and opinions. It would be challenging for the newest generation to operate at such a high capacity without having endured the tribulations and struggles of what it took to get to this point. More often than not, this generation has not had the opportunity of sharpening their teeth through real life experiences yet.
Key Factors in Generational Decline
Several key factors contribute to the decline in success across generations:
- Lack of Succession Planning: Many founders are so focused on running the business, they fail to plan for a time when they will no longer be in charge. Without a clear management succession plan, the business can falter and slip through the fingers of the next generation.
- Erosion of Entrepreneurial Spirit: As the business passes from one generation to the next, the entrepreneurial spirit driving its initial success can diminish. The later generations may not feel the same level of urgency or passion, leading to stagnation. If you aren’t focused on growing into the future, you are typically falling behind.
- Family Conflicts: As the family grows, so does the potential for conflicts. Disagreements over the direction of the business, the role of family members, and how profits should be shared can all contribute to the company’s decline. New spouses, children inside the business versus children on the outside, and divisiveness between roles and responsibilities; it can be challenging to keep everyone rowing in the same direction.
- Market Changes: Each generation faces a different market environment, and the strategies that worked for the founders may not be effective in a new, rapidly changing marketplace. Culture, technology, and growth strategies all play a role in the future success or failure of the business.
Breaking the Cycle
While the statistics are daunting, they are not insurmountable. Family businesses that succeed across generations tend to have certain qualities in common: they embrace change, invest in managerial succession planning, and are willing to professionalize their operations. By focusing on these areas, it is possible to break the cycle and ensure that the business not only survives but thrives across multiple generations.
Family businesses are more than just a means of income; they are legacies. Ensuring that this legacy continues requires foresight, adaptability, and a commitment to preserving the core values that made the business successful in the first place.
Starting my business in 2011 with my older brother, this is a significant personal goal and focus of ours. Reminding myself to enjoy the journey and not the destination has reaped rewards. Embrace and enjoy your constantly evolving business. As the saying goes, “adapt or die”. Work with experienced professionals and strategically plan ahead. I wish you the best.
1: Source: Score.org
2024-180049 Exp 08/26