Family Business Myths

Family Business Myths

There are a number of family business myths that are often used to scare family businesses into some form of action. Typically that is to the benefit of those that are using the statistic or myth. In this episode of the show I look at 3 common family business myths and give my views on their validity and usefulness.

Succession Statistics

The first myth I look at is that only 3% of family businesses make it to the third generation. Now the statistics that have gone into this are in fact real statistics, however they look at the ownership of a very select group of businesses in a particular sector in a particular city in the US.

The study actually found that 30% made it through (not to) the first generation, 13% through the second generation and 3% beyond the third generation.

Given that the study focussed on a particular city and sector within that city, means that applying that as a rule across all family businesses across the globe is not particularly useful.

It is true that continuity, transition, succession or whatever you want to call it, is a challenge for family businesses, but this is also true of all businesses.

Listen to the Episode here: 

 

The statistics around startups is that around 90% fail within their first three years, the average lifespan of a business listed in the Fortune 500, on FTSE or Dow Jones is around 50 years so family businesses are not out of sync on this.

Shirtsleeves to Shirtsleeves

Although similarly used to refer to succession, this actually relates to family wealth and is a far earlier myth than the statistics above. 

The saying itself has versions across multiple cultures, so you would be forgiven in thinking that there must be some truth to it, but I suggest you consider it more as an old wives tale similar to the 5 second rule for food that has been dropped on the floor (for me this depends on what’s been dropped!), cracking your knuckles leading to arthritis or that bad things happen in three’s. 

There are undoubtably families where the wealth hasn’t made it to or beyond the third generation, but it is not a rule. There are countless examples where this isn’t the case and wealth has continued well beyond the third generation.  

Those families will have needed to do work in order to ensure that this is the case, but I dare say that has very little to do with the family business myth of shirtsleeves to shirtsleeves. 

To my mind, it is far better for families to define their own measure of success and strive towards that than it is to worry about these family business myths such as succession stats or shirtsleeves to shirtsleeves.

As a fictitious example – if we take the case of a family who have, through meaningful discussion and over a period of time decided that the best way for them to achieve their measure of success is to sell to an Employee Ownership Trust

The funds that can be released to the family (directly or via trust) then act as an enabler for future generations to follow their own dreams. The business is majority owned by the employee ownership trust and assuming it is run well, will help support the employees and their local community. 

Compare this to the scenario where a member of the third generation feels compelled to take on the running of the business, as this is what is expected of them. They do so with the cloud of the three-generation rule hanging over them and them living with the stress and mental health impact of taking on a role they feel duty bound to do. 

This then leading to the poor performance of the business and ultimately poor outcomes for all involved.

Extreme examples but one is deemed a success, the other a failure as far as the statistics are concerned.

Governance solves everything

The next family business myth I want to address is that “Governance fixes everything”.

I have to be careful here as I help family businesses to put Governance in place, but I do this through meaningful and detailed conversation rather than a ‘cut and paste’ Family Charter, for example.

The conversations that lead to positive and relevant governance is what is valuable, rather than the resulting documentation and yet the focus is on the tangible and sellable ‘Charter’. 

In general the frameworks and models that are used to diagnose family business challenges can be similar. They can be exceptionally useful in helping to understand what is happening, but any answers and solutions lie within you and your family.

Sometimes you might need help with that and there are experts able to do that, but finding what works for your family requires an appreciation that each is unique and therefore there is no cookie cutter solution or copy and paste outcome that is likely to be impactful over time. 

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Transcript

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