The Continuity Myth

Family business continuity isn’t the only option.

You’ve read the statistics: Only 30 percent of all family-owned businesses survive into the second generation and only 12 percent will survive into the third generation. Only three percent of all family businesses operate at the fourth generation and beyond. Even if you haven’t read Roy Williams and Vic Preisser’s 2003 book, Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values, which gleaned these statistics from their study of 3,250 business-owning families, you’ve probably been served up the data by wealth management firms, private banks, and family business consulting operations seeking to persuade you that your family business is at great risk. “Do the right thing,” they say (invest more wisely, do your estate planning, form a family office, etc., etc.). Then, your business will continue generation after generation, and all will be well.

We here at Engaged Ownership don’t buy it.

We’re not challenging the statistics—we imagine that new research would come up with similar numbers. It is indeed unlikely that a family-owned business will make it to the third or fourth generation. Nor do we disagree, most of the time, with the suggestion that better planning will result in better outcomes.

What we want to challenge is the intimation that it’s the family’s fault if a family business ceases to be operated by its founding family—and, by extension, that when a family doesn’t “pass a business on,” they’ve failed.

There are plenty of good reasons why a business might not continue through multiple generations, and plenty of them have nothing whatsoever to do with family ownership. Seismic financial changes like the Great Recession of 2008 can make financing nearly impossible to obtain. Creative destruction by a new entrant— think Uber—can render an entire business segment obsolete. Non-family businesses are at no less at risk than family businesses when the universe turns upside down. (And sometimes, it’s the family businesses that have the advantage, because they typically have stronger balance sheets, a longer time horizon, and the family’s dogged determination to achieve their vision.)

We think a big part of the problem lies in how “continuity” is measured. Is continuity solely about one business, or would it be more enlightening to look at the continuity of all the family’s forms of capital over time?

A business isn’t the only place that families can deploy and redeploy their Human, Enterprise, and Financial Capital. What about a new venture, that an entrepreneurial family member launches using seed capital from the original business? Just because the new venture isn’t wholly owned by the original business doesn’t mean it shouldn’t be considered part of the original business for purposes of measuring continuity. And, operating a business isn’t the only way to put Human, Enterprise, and Financial Capital to productive use. If a family member carries on the family’s values and legacy by studying medicine and developing a lifesaving new surgical technique, why isn’t that continuity?

Let’s look at the issue from the other side as well. Continuity is not always an unmitigated blessing. Family members who only remain owners of the business because they’re tied together by a trust created by a well-meaning patriarch, and who spend their creative energy challenging the trustees in court in an effort to increase dividends to free up capital for other uses, are consuming the available Human Capital. Destroying the family’s reservoir of mutual good will for the sake of the business is continuity in name only, not in spirit.

We’ve said before that owners who lack a shared purpose will not be able to develop a common vision for the future. A lack of shared purpose is not a cause for shame—instead, it’s a call to action. A group of family business owners who find themselves without a shared purpose have a choice. They can fight each other for dominance, or they can preserve their capital—and their family relationships—by coming together to figure out how—and in which ways—to separate.