Business

The three-generation rule of a family business is “nonsense”

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Arguably the most prevalent trope of the longevity of family businesses is the three-generation rule. Josh Baron, one of the world’s leading family business consultants, reckons its nonsense. 

But Baron, who has recently co-authored The Family Business Handbook for the Harvard Business Review, believes family businesses are still among the most robust corporate entities around and are in a good position to ride the post-Covid-19 pandemic economic upturn. 

There are reasons why I’d be concerned about being a family business in the current environment, but on the flip side, many are positioned well to deal with all the disruption

“I get frustrated with the three-generation rule and the failure rate of family businesses; most of it is nonsense,” he says. “The reality is that making a business last 90 years, or three generations, is a huge challenge.”

The three-generation rule for family businesses, often described by the adage: shirtsleeves to shirtsleeves in three generations, says the third generation cannot manage the business and wealth they inherit, so the company ultimately fails, and the family’s wealth goes with its failure. 

Baron believes all businesses face enormous challenges with digital disruption in the world economy. “There are reasons why I’d be concerned about being a family business in the current environment, but on the flip side, many are positioned well to deal with all the disruption.” 

Baron, who co-founded the Boston-based family business and philanthropy consultancy BanyanGlobal, says one of the great strengths of family businesses is their long-term investment horizon. 

“I work with one family business in the heavy manufacturing sector. It has just invested a ton of money in improving efficiencies in their facilities and making them much more environmentally friendly. Eventually, it will make them more profitable and reduce their environmental footprint.

“The problem is it’s going to take five years to pay off. But they don’t care at all about the time required because they are a family business. That’s attitude isn’t going to get you far in Wall Street.”

Baron says too much attention is given to the Big Tech players in the business world, which obscures what’s going on in the real economy.

But much of the real economy is dominated by often low profile family businesses that don’t answer to quarterly targets, make long-term investment decisions and build reputations around social capital. 

“They have advantages on other businesses, and they are going to emerge from the Covid pandemic better than many of their competitors,” says Baron. 

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