Family Business Success Rate Drops to 12% by Third Generation
· music
The Family Business Dilemma: Why Optimism Can Be a Threat to Success
The Goldman Sachs playbook has highlighted the 12% success rate of family businesses making it to a third generation, sparking an important conversation about intergenerational business ownership. This statistic is often seen as dire, but others view it as a natural consequence of the complex web of interests and priorities that emerge when families become involved in business.
The issue extends beyond simply handing over control from one generation to the next; it also involves navigating conflicting objectives among family members. As François-Xavier de Mallmann, chairman of Goldman Sachs’ Investment Banking division, notes, most succession plans are informal, making it difficult for founders to formalize a plan due to the complexity of making consequential decisions.
Family-controlled companies tend to outperform non-family-controlled ones over time, but maintaining control becomes increasingly challenging as the business grows and individual family members’ interests diverge. Recognizing these competing interests and balancing them is crucial for long-term success.
Changing ownership structures can be necessary to protect a family’s legacy, involving steps such as consolidating control, scaling operations, accessing new capital, or bringing in outside expertise. In some cases, ceding company control may serve the business’s long-term interests.
However, the interests and priorities of individual family members also come into play. As families grow in complexity, different members often have varying objectives around liquidity, creating tension and making decision-making even more challenging.
The Role of Formalization
De Mallmann emphasizes the importance of starting succession conversations early, rather than waiting for a “right moment” that may never arrive. By formalizing plans, founders and families can establish a structure that evolves alongside the business, giving them time to prioritize and make informed decisions.
This process requires making consequential decisions about who should lead the company, what roles individual family members should play, how ownership should evolve over time, and when a transition will occur. These are not trivial matters, and it’s no wonder that many founders struggle to formalize plans.
The Voting Rights Conundrum
Goldman Sachs’ advice to separate economic interests from voting rights is particularly relevant in this context. However, as de Mallmann notes, there is no one-size-fits-all solution when it comes to retaining or relinquishing control. Some founders choose to sell during their lifetime, while others plan carefully for how voting rights will pass once they are no longer alive.
A Case-by-Case Approach
Each situation involving family businesses and succession planning is unique, with a wealth of precedents to learn from as families navigate these complex decisions. The challenges facing family businesses extend beyond simply formalizing plans or separating economic interests from voting rights; they also involve understanding the intricate web of interests and priorities that emerge when families become involved in business.
By embracing this complexity and approaching decision-making with a nuanced perspective, families can position themselves for long-term success – even if that means making tough choices along the way. But one thing is certain: optimism alone will not be enough to ensure the survival and prosperity of family businesses beyond a few generations. It’s time to confront the harsh realities of intergenerational ownership head-on and develop strategies that prioritize both business interests and family objectives.
Reader Views
- TSThe Stage Desk · editorial
The statistics on family business success rates are nothing new, but what's often overlooked is the psychological toll of maintaining control across generations. Founders often struggle to let go, not just because they're attached to the legacy, but also because ceding power can be seen as a personal failure. This emotional complexity is a major hurdle for families navigating succession plans, and it's an area where advisors and family members need to have open and honest conversations about what success truly means in this context.
- IOImani O. · indie musician
The 12% success rate of family businesses making it to a third generation is less about failure and more about an unrealistic expectation. Most families don't even start with a clear vision for their business's future beyond the founder's lifetime, let alone a detailed succession plan. Until we acknowledge that business growth and family relationships are fundamentally at odds, we'll keep seeing families torn apart by conflicting interests and poor decision-making. Formalizing succession plans is just a Band-Aid; true success requires redefining what it means to be part of the "family" business in the first place.
- KJKris J. · music critic
It's time for family businesses to stop relying on optimism as a succession strategy. While enthusiasm is great, it won't bridge the gap between competing family interests and the business's long-term needs. Formalizing succession plans is crucial, but that's not enough; it's equally important to acknowledge and address the elephant in the room: the growing wealth disparity within families themselves. Without transparent discussions about liquidity, equity distribution, and future goals, even the most well-intentioned family businesses will struggle to adapt to changing circumstances.