Shirt sleeves to shirt sleeves - Family Business - Column

Nation's Business, Sept, 1992 by John L. Ward, Craig E. Aronoff

Why family firms often last no more than three generations; planning for both succession and growth.

In virtually every language there is a similar, fatalistic view of family wealth and enterprise. In England the phrase is "from clogs to clogs in three generations." In Italy, it's "from barn stalls to the stars and back to barn stalls."

In Chinese there is a comparable expression: "The first generation builds the wealth; the second generation lives like gentlemen; the third generation must start all over again."

Our statistical research supports these observations about family-owned firms. The average life expectancy of a successful business owned by one family is 50 to 60 years.

In other words, the typical family ceases to own the source of its wealth sometime late in the second generation or early in the third.

Why? We've long been interested in learning the causes or reasons for "shirt sleeves to shirt sleeves." As planners, we want to understand the forces that work against family-business continuity so that preventive efforts might be taken.

We think we have identified six major pathologies" that can afflict family businesses as they pass through the generations. Certainly none of them is inevitable, but they offer real challenges to most families.

Inherited wealth can destroy entrepreneurial drive. When security and affluence come too easily, the work ethic can be compromised. Success requires sacrifice, but that lesson is difficult to learn when wealth eliminates the need for sacrifice.

The second generation, no matter how intelligent and educated, can fail to develop the "fire-in-the-belly" determination to lead a business through the demanding challenges of change.

Some families counteract this syndrome by requiring their heirs to purchase the business and thereby experience the pressure of debt. Others give the business as a gift but give no other family cash--perhaps leaving the cash to charity.

Both approaches are based on the commitment to pass on opportunity but not readily consumable wealth.

Successful entrepreneurs can't change personal patterns. We have read that "the price of the battle for early survival is the later need for stability, security." We see this frequently. The formula that provides early success must change with the times, but the entrepreneur fears changing the recipe. We see business after business become rigid, frozen by unchanging industry definition, company mission statement, competitive assumptions, and day-to-day policies. Involvement of a board of outside directors is the best way we know to challenge historic assumptions and build the entrepreneur's courage to change.

A dominant focus on business leads to an underdeveloped family. The tensions and long hours of developing and running a growing or struggling business can distract an entrepreneur's attention from family life and discourage development of family skills. Family members fail to experience the process of talking through and solving problems, and as a result, those skills are lacking when they are needed by those who are to lead the business in the next generation.

When we observe families in which these skills are highly developed, we usually discover that they have resulted from extra-special efforts made by the spouse of the business leader.

Business financial growth can't keep up with family expansion and rising family lifestyles. Families usually grow exponentially--and with hopes for ever-improving standards of living. Few businesses have that much perpetual potential. Moreover, the business must fund confiscatory death taxes.

Frankly, the longest-lasting family businesses we know typically have a limited number of family members dependent on the business for their financial welfare. By having few offspring per generation, developing other sources of income, restraining lifestyles, or using capital from other investors to expand their resources, balance can be maintained between family financial demands and the business's ability to supply funds.

Family lacks respect for the professionalism of effective management. Because family members may not be well-educated in management, they don't fully understand the sophistication and art required to be a manager. Consequently, they put ill-prepared family members in important positions, fail to adequately reward key managers, or are unable to identify, recruit, and retain great managers.

Whatever the reason, without effective professional management, the business is weakened.

The best family businesses we know have extraordinarily high standards for their managers--whether family or not.

Business becomes an arena to act out family conflicts. Almost all families have rivalries and rebels. Some have jealousies and perceived injustices from long ago. All these conflicts become focused in the business. Were there no family business, the conflicts would probably still exist and be unresolved, but there would be no inviting forum to encourage perpetual re-enactment.

Families must recognize that conflicts are normal and must work to manage conflict through family meetings, by encouraging personal growth and the development of communication skills, and by strengthening family relationships.