Do most family businesses really fail in the third generation?

If you are a fan of the HBO show HeritageOr if you are aware of public and ongoing conflicts between some of the most visible family businesses in the world, think about it. Murdoch or Sumner Redstone Family – The family business can seem more vulnerable than other forms of business. Indeed, it is conventional knowledge. Many articles and speeches on the family business today refer to the “three generations rules”.

But this perception could not be far from the truth. On average, the data suggests that family businesses last much longer than typical businesses. In fact, they now dominate most of the lists of the world’s most sustainable company, and they are a good position to maintain competitiveness for 21 years.NOT. The economy of the century.

Unique study, decades ago

Where do the three generations of ideas come from? 1980s single Searched for a manufacturing company in Illinois. This study is the basis of most of the facts cited about the longevity of the family business. The researchers took a sample of companies and tried to identify which companies were still in operation during the study period. Next, we group the companies into 30-year blocks, roughly representing generations. In this survey, only a third of family businesses passed the second generation and only 13% passed the third generation.

Some observations on the study:

First, its main conclusions are often distorted. Many explain the results and say that only a third of the family business achieved it. TO Second generation. But research shows a third actually does Use The end of the second generation, 60 years. Choose your words carefully, because that’s a 30-year difference in business life!

Second, the survey does not say how it compares to other types of businesses. Research Of the 25,000 IPOs from 1950 to 2009, we found that on average, they did not last about 15 years, or even a generation. father, the S&P 500 holding period is shortened. If the average firm joined the index in 1958, it would stay there for 61 years. In 2012, the average seniority was 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 a third will disappear in the next five years. The risk is a 5% risk that the SOE faced in 1965.

Finally, the investigation does not make it possible to understand why certain companies have disappeared. Family disputes and business issues have certainly hurt some of them, but in other cases the owner may simply have sold their business and started a new one. It is far from being a “failure”.

3 generations of myths

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

Third-generation myths are so prevalent that they can be self-fulfilling prophecies for families who believe the potential for long-term success builds up against them. That’s almost what happened to a successful business family that we counseled, and independent board members, they wanted to keep their business going. 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 very much appreciated the idea of ​​leaving the business as a family heirloom rather than cashing it in and making money for the next generation. So when they were ready to retire, they wondered whether to sell their business to their long-standing non-family business or pass ownership to the next generation. With advice from board members, they felt they had to choose between making the business last longer or keeping it with their families. However, they felt it was not the right choice and decided to give homestead a try.

It was a wise decision. The brothers are well on their way to transferring ownership to the next generation, and the business thrives with the help of non-family owners who bridge the gap between retired owners and their successors.

So is there something in the 3rd generation myth? Of course, some families go from poverty to wealth and come back, but on average this is not the case. Those who climb to the top of the wealth ladder tend to stay there longer. Gregory Clark, an economist at the University of California at Davis, found it when he took a major step. Social Mobility Research Beyond Generations: Rich families generally 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. In the same way, the economist of the Bank of Italy studies the tax files in Florence in 1427 and 2011, they found that the highest incomes of today were “already at the top of the socio-economic scale. six centuries ago ”.

In short, if your family business goes bankrupt, you rarely have to worry about the evaporation of the wealth it produces for you.

Think by generation, not by quarter

The sustainability of the family business is important not only for the owner but also for the economy. According to the US Census Bureau, family 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 a partnership of two people Fortune 500 Companies, these companies represent half of the country’s employment and half of the US gross national product.

Can the family business remain a major source of jobs nationwide? Overall Long term? 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 steps to withstand 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 business sells a combination of wood products that doesn’t make sense to fit into one business if the business is started from scratch. Species, colors and other trends depend on trends over the years. As a result, some of the company’s products generally work, while others do not. At this point, it may be more beneficial to ditch unpopular products and favor current artists, but it risks making the business irrelevant when preferences change again.

In addition, like many family businesses, Robinson Lumber borrows little from banks. Debt is a great way to finance growth and return on equity, but it also puts the business at risk during the inevitable economic downturn. Family businesses last longer because they can pay the prices that longevity demands.

A bright future after a pandemic

Compared to widely owned state-owned enterprises, family businesses tend to thrive when: Times get tougher. The pandemic has provided proof of this. Few businesses are unaffected by the challenges of the pandemic, but family businesses seem to emerge better than their competitors.

In December 2020, we are looking for family businesses around the world (140 respondents from five continents representing more than 25 industries) not only experienced the worst bad weather, but are hoping to land in the coming months. He showed an optimistic outlook. 68% of those surveyed believe they will be able to operate more efficiently when the pandemic is over. And more than half believe 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 polled believed the market share would not only survive, but increase over the next few years.

Home ownership offers a competitive advantage in situations that require resilience rather than rapid growth. A family business with a close owner of a business can adapt quickly to changing situations and balance the essentials with the long term implications to survive the current crisis. It means working hard not only to save money, but also to ensure the well-being of our employees and the community. Among numerous studies, family businesses have been shown to be better employers and community citizens than their non-family counterparts. This is a clear competitive advantage and best represents capitalism.

Editor’s Note: Updated this article to clarify the Family Business Longevity Survey.

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