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Dispelling the Myth of the “Three-Generation Rule” in Family-Owned Businesses

  • Persistent “three-generation rule” suggests that family-owned businesses are doomed to fail after being passed down a couple of times
  • Harvard Business Review article looks at the origins of this idea and seeks to dispel the myth
  • Family-owned businesses last longer than the standard company and enjoy a number of competitive advantages

Summary by Dirk Langeveld

Family-owned businesses account for 90 percent of companies in the United States as well as half the nation’s employment and GDP, according to the Census Bureau. They’re also doomed to fail after they’ve been passed down through the family a few times due to family disputes, irresponsible decisions by younger successors, or other factors, according to a persistent “three-generation rule.”

However, data suggests that family-owned businesses are much better-suited to endure for a long time. In a recent article for the Harvard Business Review, the co-founders of BanyanGlobal Family Business Advisors look at the origins of the three-generation rule and seek to dispel the myth.

  • The authors suggest that the rule stems from a single study in 1980 focusing on manufacturing companies in Illinois and defined 30-year blocs as generations; this research determined that only about one-third survived through the second generation and 13 percent through the third generation
  • On the whole, data suggests that family-owned businesses last much longer than the standard company; one in three companies don’t make it past five years, and the average publicly traded company between 1950 and 2009 only lasted about 15 years
  • Wealth generated in a family business is sometimes squandered by a later generation, but typically helps set them up for ongoing success
  • Other competitive advantages include the ability to adapt quickly and balance short-term objectives with a long-term vision
  • The three-generation rule can nevertheless influence business decisions, with some advisors even urging business owners not to pass down the company to family in their succession plan

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