Do Most Family Businesses Really Fail By the Third Generation?
Executive Summary: Perhaps the most commonly-cited statistic about family businesses is their failure rates. Most articles or speeches about family businesses start with some version of the “three-generation rule,” which suggests that most don’t survive beyond three generations. But that perception could not be further from the truth. The data suggests that, on average, family businesses last far longer than a typical public company does. Far from being doomed to failure, family businesses across the world will continue to be a leading source of jobs and economic growth for years to come.
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.
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 thirty-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 sixty years. That’s a thirty-year difference in business longevity, so choose your words carefully!