By Robert Holton
Most family business owners have heard these statistics: 30% of family businesses make it to the second generation and only 13% make it to the third generation. This often-repeated statement, which is widely accepted as fact, actually is wrong.
The research that is the source for the statement, conducted by John Ward of Northwestern University's Kellogg School, is accurate. Ward, who also co-founded the Family Business Consulting Group, published his findings in 1987 in his book Keeping the Family Business Healthy. His team researched 200 randomly selected Illinois manufacturers listed in annual publications from 1924 to 1984. Here is what they found in those records:
• 20% still survived as an independent firm with the same name. Of that 20%, 13% were still owned by the same family.
• 80% no longer survived as an independent firm with the same name.
Of that 80%:
• 33% ceased operating 0 to 29 years from the date of their founding.
• 35% ceased operating 35 to 59 years from the date of their founding.
• 16% ceased operating 60 to 89 years from the date of their founding.
• 16% ceased operating 90 years or longer from the date of their founding.
Ward presented the data on the first page of his book as follows: "Only 13% of successful family businesses last through three generations [emphasis added]. Less than two-thirds survive the second generation."
It's a fairly innocuous finding—interesting but limited. Unfortunately, these statistics have taken on a life of their own. Let's take a quick survey of the misperceptions they have caused.
A scary misquote
Many people who cite these findings misquote the highlighted word "through" as "to." Thirty-two percent of firms lasted at least 60 years, or through the second generation. Misquoting "through" as "to" reduces the life expectancy of the firm by at least 30 years. Further, the research indicates that nearly 13% of the companies in the study lasted as independent firms with the same name for at least 90 years, which is well into the fourth generation. The upper limit of years was not given, so this 13% may have continued for many more generations.
These statistics are from a 1987 study of manufacturers that existed in 1924 in the Midwest region of the U.S. and survived the Great Depression. To suggest these results can be extrapolated for all family-owned businesses, in all industries, in all geographies and in all economic times is a stretch. As a simple example of how industries change, the Dow Jones Industrial Index in 1924 included American Locomotive and Baldwin Locomotive, as well as only one herald of the automotive age to come: Studebaker.
'Failing' by selling at a profit
The use of the word "survival" in this context is interesting. The original study looked at whether a firm was still independent and had the same name. Firms that were sold, merged or spun off into a new, more successful enterprise would be excluded.
More recent research suggests successful families often experience "transgenerational entrepreneurship," in which one generation inspires the next generation of entrepreneurs, but often in new ventures (T.M. Zellweger et al., Family Business Review, 25:136-55, 2012). This far more useful framework suggests a new way to look at how families succeed in business. Though the sample size for this more recent study is also small (only 118 participants), it casts new light on what we might consider family success. The families in this study currently controlled 3.4 companies on average but acknowledged control over an average of 6.1 companies in the family history. This would suggest they were responsible for 2.7 "failed" companies on average, because they had not continued to transfer ownership to family members. This seems like a ridiculous conclusion in light of the families' success; more likely, these divestments reflect a thoughtful progression of the family wealth strategy.
The next time you hear the 70% failure statistic, be aware of the inaccuracy. Further, it might be worth considering whether the person citing the statistic is making an innocent mistake or is using it as a scare tactic with an ulterior motive. The important factor is not survival, but entrepreneurship.
Robert Holton is vice president in the Private Client Group at Cleary Gull (www.clearygull.com).
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