It is bizarre that when family firms fail to continue ad infinitum they are considered to have failed. Family firms that don’t make it to the third generation are said to be prey to some sort of curse, “from clogs to clogs in three generations” as they say in the Netherlands. But assuming a generation is 20 years, how many businesses – family-owned or not – make it past 40 years? Will Google? Why is this considered a unique sort of failure for family firms?
Maybe family businesses have themselves to blame, because they are often obsessed with keeping going. Everything else – succession, governance, strategy – is designed to encourage longevity. Families often talk about planning 20 years ahead and it is not unusual for people to mention their grandchildren in their plans. The success of a family business is often measured in terms of the number of years or generations it has been in business.
Perhaps that way of thinking is unrealistic, and damaging. The highly respected British economist John Kay once wrote that “humans have always found it hard to cope with the idea that every individual has a lifespan even as life itself goes on. The idea of a natural life cycle for a business, or industrial centre, is even more difficult to accept.”
This difficulty is magnified in family businesses because family members are emotionally entangled with it. But they fail, like all businesses, because people no longer want to pay for their goods or services. That is not a bad thing, as Kay argues, but a structural feature of capitalism. It’s nothing to cry about.
In fact, family businesses are even more likely to fail because they can outgrow their usefulness in more ways than others. If a family gets too big for the family business to feed, then maybe there is no point carrying it on, and often the dividend payments are less attractive than the pay-out that breaking it up would bring. Sometimes an immigrant family without contacts or capital is forced to set up a business, but future generations have other, less risky options to make a living and close the business. Or perhaps there is no heir.
Family businesses, uniquely, provide their owners with what academics call “socioemotional wealth”, meaning non-financial value (for example respect in their community). There have been cases of families who would rather close the business rather than admit the family can no longer run it. In some industries, for example in traditional wine-making firms, the family head would prefer to heroically go bust doing things “the right way”. Both strategies are logical, in the minds of the owners.
And why not? Family members can feel a great emotional pressure to keep the family business going out of a sense of loyalty to their relatives – living or dead – or employees, but there are times it is better to let it die a dignified death so the owners can get out before they are reduced to clogs by a doomed business. Failure is not the worst that can happen.