The Myth of the “Third Generation Rule”
08/05/2021
The Third Generation Rule is the commonly cited notion that suggests most family businesses don’t survive through the 3rd generation. Josh Baron and Rob Lachenauer, writing for Harvard Business Review in an article posted July 19, 2021, did some research and provided convincing arguments that this “rule” is a myth that has been referenced without statistical or historical proof.
The original rule came from one study done in the 1980’s of manufacturing companies in Illinois. The authors are quick to point out that the core findings are often described incorrectly. In reality, the study showed that one-third of the businesses actually make it through the end of the second generation, or sixty years, rather than the belief that only one-third make it into the second year. That’s a much longer survival time. They also state that the study did not do any comparison to other types of companies. Of 25,000 publicly traded companies from 1950 to 2009, on average, these companies lasted around 15 years. The length of time that companies on the S&P 500 have survived is getting much shorter—from 61 years in 1958 to only 18 years in 2015. There is also no insight on why some of the businesses disappeared. Some of the businesses may have been sold by the owner.
The authors provide several examples of how family-owned businesses are much more likely to survive for multiple generations compared to a similar timeframe for non-family corporations. One key fact is that family businesses make financial decisions for steady growth, while publicly held companies have to provide quarterly reports and show consistent profitability. Family businesses are much more cautious about taking on debt, and they tend to do whatever it takes to keep the business running in difficult times.
For the full article, go to: https://hbr.org/2021/07/do-most-family-businesses-really-fail-by-the-third-generation
What do you think? Is this a reliable rule, or a myth that has been cited far too often?
Don Tyler
Tyler & Associates
The opinions expressed here are Don Tyler’s own and do not necessarily represent the opinions of ASAC or its members.
The Third Generation Rule is the commonly cited notion that suggests most family businesses don’t survive through the 3rd generation. Josh Baron and Rob Lachenauer, writing for Harvard Business Review in an article posted July 19, 2021, did some research and provided convincing arguments that this “rule” is a myth that has been referenced without statistical or historical proof.
The original rule came from one study done in the 1980’s of manufacturing companies in Illinois. The authors are quick to point out that the core findings are often described incorrectly. In reality, the study showed that one-third of the businesses actually make it through the end of the second generation, or sixty years, rather than the belief that only one-third make it into the second year. That’s a much longer survival time. They also state that the study did not do any comparison to other types of companies. Of 25,000 publicly traded companies from 1950 to 2009, on average, these companies lasted around 15 years. The length of time that companies on the S&P 500 have survived is getting much shorter—from 61 years in 1958 to only 18 years in 2015. There is also no insight on why some of the businesses disappeared. Some of the businesses may have been sold by the owner.
The authors provide several examples of how family-owned businesses are much more likely to survive for multiple generations compared to a similar timeframe for non-family corporations. One key fact is that family businesses make financial decisions for steady growth, while publicly held companies have to provide quarterly reports and show consistent profitability. Family businesses are much more cautious about taking on debt, and they tend to do whatever it takes to keep the business running in difficult times.
For the full article, go to: https://hbr.org/2021/07/do-most-family-businesses-really-fail-by-the-third-generation
What do you think? Is this a reliable rule, or a myth that has been cited far too often?
Don Tyler
Tyler & Associates
The opinions expressed here are Don Tyler’s own and do not necessarily represent the opinions of ASAC or its members.
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