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Do most family businesses really fail by the third generation?

By Josh Baron

If you’re a fan of the HBO show Succession, or if you’re aware of the conflicts playing out publicly and perennially among some of the most visible family businesses in the world—think the Murdochs or Sumner Redstone’s family—you might assume that family businesses are more fragile than other forms of enterprise.

Indeed, that’s the conventional wisdom: Many articles or speeches about family businesses today include a reference to the “three-generation rule,” which says that most don’t survive beyond three generations.

But that perception could not be further from the truth. On average, the data suggest that family businesses last far longer than typical companies do. In fact, today they dominate most lists of the longest-lasting companies in the world, and they’re well-positioned to remain competitive in the 21st century economy.

Rob Lachenauer is a co-founder and the chief executive of BanyanGlobal.A single study, decades old

Where did that three-generation idea come from? A single 1980s study of manufacturing companies in Illinois. That study is the basis for most of the facts cited about the longevity of family businesses. The researchers took a sample of companies and tried to figure out which of them were still operating during the period they studied. They then grouped the companies into 30-year blocs, roughly representing generations. Only a third of family businesses in this study made it through the second generation, and only 13% made it through the third.

A few observations about the study:

First, its core findings are often described incorrectly. Many describe the results to say that only one-third of family businesses make it to the second generation. But the study actually says that one-third make it through the end of the second generation, or 60 years. That’s a 30-year difference in business longevity, so choose your words carefully!

Second, the researchers found that 74% of family businesses made it for at least 30 years, 46% lasted for 60 years or more, and 33% survived for 90 years or longer. What the study didn’t say is how that compares to other types of companies. A study of 25,000 publicly traded companies from 1950 to 2009 found on average, they lasted around 15 years, or not even through one generation.

In addition, tenures on the S&P 500 have been getting shorter. If the average company joined the index in 1958, it would stay there for 61 years. By 2012, the average tenure was down to 18 years. A Boston Consulting Group analysis in 2015 found public companies in the United States faced a five-year “exit risk” of 32%, meaning almost a third would disappear in the next five years. That risk compares with the 5% risk that public companies faced in 1965.

Finally, the study provides no insight on why some businesses disappeared. Family disputes and business problems surely did hurt some of them, but in other cases the owners may simply have sold their business and started a new one. That’s far from “failing.”

The three-generations myth

There are lots of versions of the three-generation myth out there. It’s at the root of the expression “shirtsleeves to shirtsleeves,” which suggests the money made by one entrepreneurial generation is gone by the time of their grandchildren. It’s present, too, in the Brazilian saying, “Rich father; noble son; poor grandson.” Many countries have some version of that saying.

The three-generation myth is so pervasive it can become a self-fulfilling prophecy for family businesses who believe the odds of long-term success are stacked against them.

Read the full article at the Harvard Business Review.

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