“The first generation starts a business, the second generation grows it and the third generation ruins it.” is a common adage in family business circles.
The “Shirt sleeves to shirt sleeves in three generations” proverb is often attributed to Andrew Carnegie as the American translation of the Lancashire proverb “there’s nobbut three generations atween a clog and clog.”
Further investigation shows that the proverb is not unique to any one country or culture:
- In Italian it is “dalle stalle alle stelle alle stalle” (“from stalls to stars to stalls”).
- The Spanish say, “quien no lo tiene, lo hance; y quien lo tiene, lo deshance” (“who doesn’t have it, does it, and who has it, misuses it”).
- The Chinese say “富不过三代” (Not rich for three generations).
According to the Family Business Alliance, around 30% of family-owned businesses make the transition to the second generation, 12% are still viable into the third generation, and only 3% of all family-owned businesses are still operating at the fourth-generation and beyond.
Making the transition from second to third generation
One of the most difficult transitions that a family business must make is from the second to the third generation. It’s not just that the third generation, accustomed to wealth and privilege, is likely to spend the business into bankruptcy. They also have a very difficult time getting their acts together and providing the leadership necessary for the business to survive.
In the third generation, there are typically many more family members who would like to work in the company. The cousins have grown up in different households and may have far different styles and points of view. There may be extremes of personality and huge disparities in competency as well as in financial need. There may also be lingering feelings of competitiveness or memories of past injustices carried over from the second generation.
Avoiding the traps of that destroy family businesses
Trap #1: “There’s Always a Place For You Here”
Generally this situation translates into an unspoken promise which can lead children to treat the business as a fallback option. Many companies are populated by next-generation members who failed in other businesses or spent their 20s (and sometimes their 30s) as aspiring athletes, artists, or musicians before signing on to the firm as unprepared 40-somethings.
Despite their lack of experience, these offspring may ascend to leadership positions because of the family connection, increasing the chances that the business will fail.
To escape the trap: Insist on proper training and screening.
A job with the company shouldn’t be an entitlement. Those who want to join deserve no special accommodation. We now see an emerging best practice in which families formally require any child who wants a job to
- (a) earn a university degree—and in some cases a graduate degree,
- (b) gain several years of relevant professional experience outside the family business, and
- © apply for open positions in competition with nonfamily applicants.
Trap #2: The Business Can’t Grow Fast Enough to Support Everyone
An under-appreciated problem is that families often grow more quickly than their businesses do. If a company founder has three children, each of whom marries and produces three more children, each of whom marries, within three generations there could be 25 people or more (including all the spouses) working or looking to work at the company. Many businesses simply don’t have enough work to employ every family member.
To escape the trap: Manage family entry and scale for growth.
Families that have avoided Trap #1 by ensuring that only committed, qualified relatives are allowed to join the firm have already reduced the magnitude of Trap #2.
Trap #3: Family Members Remain in Silos According to Bloodline
There exists a tendency for fathers and sons (and increasingly daughters) to specialize in the same aspect of the business, whether it’s finance, operations, or marketing. This can be problematic for several reasons. First, by staying in specialized silos, next-generation managers fail to gain the cross-functional expertise needed for executive leadership. Second, when close family members supervise one another, the personal dynamic can prevent candid feedback and interfere with coaching. Together these factors can create a leadership vacuum in the up-and-coming generation.
To escape the trap: Appoint non-family mentors.
Companies should minimize the time that employees spend working for immediate relatives. Some companies assign an experienced non-family mentor to each younger family member, to provide the objective performance evaluation and critical advice an employee in a non-family business typically gets. For this to work, the coach must operate under a protective umbrella, immune from retribution by the family.