The three generations phenomenon - is it really true?

One of the most prominent pieces of conventional wisdom about family business, and indeed wealth, is the three generation phenomenon. It’s commonly referred to as the “shirtsleeves to shirtsleeves in three generations”. The adage is well known throughout the world, with the Italians saying:“from the cowshed to the stars and back to the cowshed” and the Chinese saying “wealth never survives three generations”, with many more versions in between.

Although it has become a cliche, the three-generation cycle of wealth still appears to hold true, says a new piece of research. But does it? Here’s a couple of points that suggest its relevance in the 21st century is fading fast.

Most businesses fail within the first year of operation and only a very few survive into the second generation. Businesses that survive past the first generation are likely to be successful and generate enough revenue to support the founding family and its workforce. If these businesses don’t make it to the third generation it’s more than likely that the owners have sold their company for a big sum of money rather than it has failed.

With prudent wealth planning the money realised from the sale can continue to support future generations beyond the second, if not third. Yes, the business might not have made it to the third generation, but the wealth remains around for some time afterwards.

Sometimes money generated from the sale of the business is used to support new entrepreneurial endeavours by future generations, which adds to the pot of money made by the family over multiple generations. The Rothschild family is probably the best example of this - creating new financial-related businesses as others have diminished, or are controlled by other wings of the family.

Family Capital calls this phenomenon “multiple-family entrepreneurship”. It works like this - future generations use the goodwill of a family name, which has been built up through a business, and family money, to establish new businesses. Here’s another example of multiple family entrepreneurship - Mark Getty and Getty Images. Getty is the grandson of one of America’s most famous entrepreneurs - John Paul Getty - but he has used his inherited money and name to establish a new, very successful business.

There’s another difficulty with the three generation adage and that is rising life expectancy. The continuing rise in life expectancy will mean each generation will live longer. Three generations will span a longer time than maybe the typical thirty-year cycle of management, whereby each generation will remain in charge for approximately 30 years.

The management cycle is likely to be pushed out to 40 years, maybe even longer. Second generation leaders like Rupert Murdoch are still in charge after more than 50 years. OK, Murdoch’s reign may have nothing to do with good family business governance, but individuals like him will continue to pop up in the world of business - and dominate.

For reasons to do with the changing nature of wealth creation and longevity, the hackneyed expressions around three generations of wealth creation and destruction looks likely to be relegated further in the years ahead. Maybe that’s not an altogether bad thing.