Only 1 of 10 makes it to 3rd generation

“Before the multinational corporation, there was family business.  Before the industrial revolution, there was family business.  Before the enlightenment of Greece and the empire of Rome, there was family business.”

So states US researcher William O’Hara in his book “Centuries of Success.” Figures here and abroad bear him out.  Family businesses account for 70 to 90 percent of global gross domestic product (GDP).

In the US, the world’s biggest economy, family-controlled businesses account for 57 percent of the GDP, 63 percent of the workforce and 35 percent of the Fortune 500.

How about the Philippines?  Statistics vary, but it is safe to say that family businesses account for at least 80 percent of all Filipino enterprises.

Some remarkable family businesses have survived, even thrived, through the centuries. Ayala Corporation, run by the Ayala family, began in 1834.

But for every Ayala Corporation, aren’t there thousands, perhaps even millions, of family businesses that did not make it past a generation?

After all, as the popular Chinese saying puts it, “the first generation starts the business, the second generation grows the business, the third generation squanders the business.”

How true is this aphorism? What are the odds of making it to the next generation?

Frankly, the odds are not favorable.  Only 20 percent of family businesses make it to the second generation in the UK, says the Institute for Family Businesses UK in 2012.  A dismal 10 percent make it to the third.

In the US, the statistics are mixed.  In 1983, US consultant Wayne Dyer says that the average lifespan of the family firm is only 24 years, which is also the average tenure of the founders.  Approximately 70 percent of the firms are either sold or liquidated after the death or retirement of the founders.

In 2010, Businessweek says that less than half (40 percent) of family businesses survive to the second generation,  13 percent continue to the third generation, while only a shocking 3 percent survive to the fourth generation and beyond.  Whatever the odds are, they are not good.

What are the survival rates in the Philippines?  I have no idea.  (If readers can send me figures backed by studies, I would be grateful.)

The problem of succession is so troubling that researchers have studied various ways to ensure smooth transitions.   One is culture—the basic assumptions, shared meaning, expectations and values.

Culture can be transmitted through the structure of the organization itself, formal statements of business philosophy, explicit reward systems, criteria for selection or promotion of employees, stories about key people and events, and leaders’ reactions to critical incidents.

How can family businesses beat the odds?   The successful ones plan ahead, communicate effectively, agree on principles and values before conflicts arise.  Many family businesses hire consultants to assist them in strategic planning.

When the business grows and non-family employees join the business, governance is usually coursed through a board of directors.  Several strategies exist for succession:  appointing an heir apparent, hiring outside professional managers, going public on the stock market, and so on.

No approach is better than the rest.  The key is to analyze which method works best for a particular family business.

Queena N. Lee-Chua is on the board of directors of Ateneo de Manila University’s Family Business Development Center.  Get her book “Successful Family Businesses” at the University Press (e-mail [email protected].).  E-mail the author at [email protected].