The perception that most family businesses fail by the third generation is a common misconception. In fact, data suggests that family businesses tend to outlast typical public companies. However, there are certain factors that can contribute to the failure of third generation businesses.
Key Facts
- Three-generation rule: The “three-generation rule” is a commonly cited belief that suggests most family businesses do not survive beyond three generations. However, this perception is not supported by data, as family businesses, on average, tend to last longer than typical public companies.
- Lack of planning: Failure to plan ahead and establish a succession plan can be a significant factor in the failure of third generation businesses. In a survey, it was found that only 50% of the sampled businesses had a succession plan, and even fewer had appointed a person to take over the business.
- Resistance to change: Older generations holding on to traditional ways of doing business and being resistant to change can hinder growth and miss out on key opportunities. Adapting to the ever-changing economic environment is crucial for the long-term success of a family business.
- Managerial inexperience: Younger generation family members who are placed in key management positions without proper experience, training, and knowledge can make poor decisions that negatively impact the business. It is important for successors to learn all aspects of the business and gain the necessary skills before taking on leadership roles.
- Family conflict: Persistent family conflict or generational conflict about the business’s goals, direction, vision, values, and future can be damaging. Unresolved conflicts can lead to hasty and detrimental business decisions, such as selling, splitting, closing, or merging the business.
Lack of Planning
Failure to plan for succession is a major reason why third generation businesses fail. Many businesses do not have a succession plan in place, and even fewer have appointed a successor. This lack of planning can lead to confusion and conflict when the time comes for the founder to step down.
Resistance to Change
Another factor that can contribute to the failure of third generation businesses is resistance to change. Older generations may be reluctant to adopt new technologies or business practices, which can hinder the growth and success of the business.
Managerial Inexperience
Younger generation family members who are placed in key management positions without proper experience or training can make poor decisions that negatively impact the business. It is important for successors to gain the necessary skills and knowledge before taking on leadership roles.
Family Conflict
Persistent family conflict or generational conflict about the business’s goals, direction, vision, values, and future can be damaging. Unresolved conflicts can lead to hasty and detrimental business decisions, such as selling, splitting, closing, or merging the business.
Conclusion
While the “three-generation rule” is a myth, there are certain factors that can contribute to the failure of third generation businesses. Lack of planning, resistance to change, managerial inexperience, and family conflict can all play a role in the downfall of a family business. By addressing these issues, family businesses can increase their chances of success and longevity.
Sources
- Do Most Family Businesses Really Fail by the Third Generation?
- Avoid the Traps That Can Destroy Family Businesses
- 5 Common Reasons 3rd Generation Family Business Can Fail
FAQs
Why is there a perception that third generation businesses fail?
- The “three-generation rule” is a commonly cited belief that suggests most family businesses do not survive beyond three generations. However, this perception is not supported by data, as family businesses, on average, tend to last longer than typical public companies.
What are some of the factors that can contribute to the failure of third generation businesses?
- Lack of planning, resistance to change, managerial inexperience, and family conflict can all play a role in the downfall of a family business.
How can family businesses avoid the pitfalls that can lead to failure?
- By addressing the issues mentioned above, family businesses can increase their chances of success and longevity. This includes having a succession plan in place, being open to change, providing proper training for successors, and resolving family conflicts in a productive manner.
What are some examples of successful third generation businesses?
- Some examples of successful third generation businesses include:
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- Walmart
- Ford Motor Company
- Mars, Incorporated
- Cargill
- Koch Industries
What are some of the benefits of family businesses?
- Family businesses often have a strong sense of purpose and commitment to their employees and customers. They can also be more flexible and adaptable than larger, publicly traded companies.
What are some of the challenges that family businesses face?
- Family businesses can face a number of challenges, including:
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- Succession planning
- Managing family conflict
- Balancing the interests of family members with the needs of the business
- Adapting to changing market conditions
How can family businesses overcome the challenges they face?
- Family businesses can overcome the challenges they face by:
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- Having a clear succession plan in place
- Establishing a family council or board of directors
- Communicating openly and honestly with family members
- Seeking professional advice when needed
What is the future of family businesses?
- Family businesses are expected to continue to play a significant role in the global economy. They are often well-positioned to adapt to changing market conditions and to compete with larger, publicly traded companies.