Overcoming family business myths
Family businesses are reputed to be unprofessionally run and destined to fail in the third generation. So how does one explain the continuity of companies like Cargill Inc. (founded 1865), S.C. Johnson & Son (founded 1886) and Mars Inc. (founded 1891)?
For about five years, Dennis Jaffe of Wise Counsel Research and his team have been studying what he calls “generative families” — those who have successfully pursued business opportunities as a family for more than three generations. Jaffe and coworkers have examined nearly 90 families across 20 countries who created a successful business (or set of businesses) with annual revenues of more than US$200 million. Families in this study range from the third to the eighth generation of shared family enterprise.
In his fifth working paper based on this research (“Resilience of 100-Year Family Enterprises”), Jaffe debunks five prevalent myths about family businesses. If your transition plans are being guided by these false assumptions, it’s time to reframe your thinking.
1. Family businesses face a predestined decline over three generations. Most family business owners have heard the saying, “Shirtsleeves to shirtsleeves in three generations,” meaning that a founder’s children and grandchildren are likely to mismanage the family business. What’s more, frequently cited statistics (from a study conducted back in 1987) imply that only about 10% of family businesses make it to the third generation. The experiences of generative families debunk the notion that decline or stagnation will inevitably begin in the second generation. These families, Jaffe reports, follow a cycle of continual reinvention across generations, rather than a path of linear decline.
2. Wealth creation takes place largely through the achievement of a single entrepreneur in the founding generation. In many generative families, the founders were only the first of a series of wealth creators. Some founders, for example, developed small, unremarkable businesses that were later super-charged by a son or daughter who led expansion and growth. Jaffe points out that a generative family enterprise often has multiple wealth creators over successive generations.
3. Wealth creation results primarily from the founding of one successful business. The founder’s success must be followed by additional — often less newsworthy — activities to sustain the business under the leadership of the second or third generation, Jaffe notes. A mature business produces capital to fund new ventures, spearheading further wealth creation.
4. A sale of the legacy business marks the end of a family enterprise. Generative families make an explicit commitment to reorganize as a business family after a sale via a family office or other shared investments, Jaffe has found.
5. Success of the business in later generations occurs because the family moves away from involvement and influence. The most demeaning myth about family businesses, in Jaffe’s view, is that they are “lesser” organizations that must evolve into “professional” enterprises by removing the emotional bonds of the family. Generative families build their businesses on a foundation of family culture and values that guide how they do business. While family values and practices can certainly undermine the business in some cases, Jaffe observes that generative families minimize the ways the family drains the business while optimizing benefits added by the family.
Seek out success stories
In today’s rapidly changing marketplace, any business whose leaders fail to look ahead is vulnerable. In 2017, Credit Suisse analysts noted the average age of companies listed on the S&P 500 was less than 20 years, down from nearly 60 in the 1950s. Family firms actually have an advantage in this regard because family owners tend to invest for the long term rather than demand profits each quarter.
This is not to suggest family businesses should be closed systems. Indeed, without the inclusion of talented non-family managers, board members and advisers, it’s likely the generative families would not have achieved the positions they enjoy today.
These top-performing family firms serve as models of transgenerational business growth and renewal. Rather than focus on ominous myths, you are better off studying successful families’ outlook and planning process to see if they can be adapted for your family business.
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