According to the Family Business Institute, roughly 30% of family businesses remain family controlled into the second generation, about 12% continue into the third generation, and approximately 3% persist into the fourth generation or beyond — figures that underscore the importance of intentional governance, leadership, development, and succession planning.
This is epitomized in American culture by the old proverb, “shirtsleeves to shirtsleeves in three generations.” In China, it’s known as “from peasant shoes to peasant shoes in three generations.” In Italy, as “from the stable to the stars and back again.” And in Scotland (perhaps most matter-of-factly), as “the father buys, the son builds, the grandchild sells, and his son begs.”
It’s a common cycle. The first generation builds wealth, often wearing many hats, taking on risk and making sacrifices to support the survival and ultimate success of the business. The second generation may continue to expand the wealth but has less proximity to the early days and “tough times.” Some family members will become philanthropists and grow accustomed to their lifestyle, with less direct involvement in the day to day of the business. The third generation — removed from the skills it takes to run the business successfully — spends the wealth. And the fourth generation is back to square one.
It doesn’t have to be that way. With the right foresight and governance, your family can avoid becoming another example of this well-worn proverb. Here are four best practices that can help change the outcome.
1. Have a plan
It’s easy to get caught up in the day-to-day concerns of your business and leave the transition planning to the last minute. Many get caught up in working “in the business” instead of “on the business,” but this won’t ensure its survival or success. It’s important to develop a business transition plan and to do so early. Successful family businesses look at this in three different facets: the strategic business plan, the personal financial plan, and emotional considerations for the family. All three are essential for the longevity of the business and long-term success of the family.
An effective plan helps you determine the future outlook of your business — including when to sell and to whom — so it can provide for the future financial needs of your family. Your plan needs to include financial planning, estate planning, ownership transition, and leadership and management training. If done well, your plan will address all the dynamics inherent in a family business, helping ensure that every generation possesses a wealth creation mentality. Without this mentality, your family business is likely doomed to the “shirtsleeves to shirtsleeves” cycle.
2. Develop the next generation
Transitioning a family business from one generation to the next is a process, not a one-time event. Family members and future leaders of the business need mentorship and practice making decisions and communicating. Too many parents pass on the family business without passing on the knowledge and skills it took to create the business. There’s so much focus and attention paid to the assets of the business that the human element — preparing successors for leadership — is often lacking. Having a strong business balance sheet is irrelevant if the next generation isn’t equipped to run the business effectively. Strong communication and effective processes in the form of updated governance and policy are essential to address changing roles and responsibilities within the business. It’s important to invest the necessary time to help ensure subsequent generations are prepared enough to do the job.
3. Continuously reinvent the business
Continuously reinvent the business while holding onto your core values. History is full of once dominant businesses that failed not because they were poorly run, but because they couldn’t adapt. Kodak, Blockbuster, and cable television all thrived in their time — until new technology and changing customer expectations rendered their models obsolete. Today, any business that clings too tightly to past success risks becoming the modern version of the “buggy whip.” Longevity belongs to those willing to evolve — without abandoning their core values. This concept resonates with younger generations who are more adept to their rapidly changing environments. For example, the next generation’s ability to embrace AI and other technology advancements may be key to propelling the family business forward.
4. Overcome the trends
Your business is your livelihood — something you’ve been building for years. Protect it and ensure that the next generations understand just what they’re inheriting. It’s been said, “To those whom much is given, much is expected.” Embracing this mentality can be the difference between becoming a successful fourth-generation business or perpetuating that doomed “shirtsleeves to shirtsleeves” family business cycle.
