If you have ever attended a family business workshop, chances are good that you have heard the “30-13-3” statistic. It’s often called on to illustrate just how difficult it is for a family firm to transition through the generations without failing. It goes something like this; only 30% of family firms make it past the first generation, 13% past the second, and a gloomy 3% make it past the third. Colloquially this pattern is often phrased “shirtsleeves to shirtsleeves in three generations”.
Before you worry if your family business can beat the odds, ask if the numbers really add up.
Where did the statistic come from?
Like most enduring sound bite statistics, the origin of the 30-13-3 numbers has largely been forgotten or misunderstood. The seed of the idea can be traced back to research conducted in the mid-eighties by pioneering family business scholar John Ward while at the Loyola University of Chicago.
Ward and his colleagues looked at the history of 200 family-owned Illinois manufacturing companies from 1924 to 1984. Using historical business records the researchers determined that over the course of those sixty years, only 13% of those businesses lasted through the third generation. Of these, only 3% actually prospered (Ward, 1987).
Though Ward was careful to point out there were limitations in the study and the results may not reflect all family businesses, use of the statistic took off and became entrenched in the family business vernacular for the better part of 30 years.
Reasons to be cautious
So why should we examine the 30-13-3 statistic? While most scholars don’t dispute the conclusions of Ward’s study, there are a few reasons why that original research may not reflect today’s reality.
First, the sample of family businesses represented in Ward’s research was relatively narrow. The cohort was limited to a single geographic location (Illinois), in a single industry cluster (manufacturing), and focused on operating firms, rather than a cohort of business that started in 1924.
Another factor is the narrow definition of success and failure. In the original study, any family business that did not pass on majority family ownership to the next generation, due to either bankruptcy, merger or acquisition, or other types of ownership changes, was considered a “failure” in the data set.
As the field of family business scholarship matures, a more realistic definition of success and failure is emerging.
The family enterprise view of success and failure
A key driver of this shift is the concept of “family enterprise.” Traditional analysis of family businesses focused on the primary operating business unit. That made it fairly simple to calculate when a particular business failed, was sold, merged with another entity, and so forth. The family enterprise view, which encompasses all of the business, entrepreneurial, family and philanthropic assets of a family group, takes a more holistic approach.
A 2012 research study conducted by family business scholars Thomas Zellweger, Robert Nason and Mattias Nordqvist clarified the entrepreneurial attitudes of family firms. Among their findings was that these second generation family enterprises controlled an average of 6.1 firms over the course of the family’s history. Further, the average family enterprise created 5.4 firms, added 2.7 through mergers and acquisitions, spun off 1.5 firms and shifted industry focus just over two times (Zellweger et al, 2012). This level and type of activity illustrates that family enterprises are very entrepreneurial and viewing success and failure at the individual business unit level oversimplifies a very complex dynamic.
Take for instance a small family business in an industry where market forces and consolidation are squeezing out all but the largest firms. Traditionally, if the family sold the business to a competitor and divested all ownership stakes, that family business would have “failed” to make it to the next generation.
But what if the capital raised from the sale of the business allowed the family to start a new business in a different industry? What if that family went on to become a major player and innovator in the market and was able to grow through acquisition of other operating businesses? Should we still consider that initial sale a failure? Not if it enabled an entrepreneurial family to continue in business and to generate wealth for future generations.
In other words, a sale of an operating family business does not necessarily mean failure. Rather, it may mean the family is free to renew and reinvent the enterprise for future generations. The histories of family businesses are filled with sales, mergers, spin-offs, and innovations. The result? Countless successful family enterprises that bear little resemblance to their original founding operations.
Stewardship and the next generation
No one ever said that transitioning a family business from one generation to the next was easy. Predicting success and failure is much more complicated than one tidy number, and focusing on unrealistic failure statistics can have real-world consequences for a family.
Family business scholar Dennis Jaffe argues that a simplistic view of family business failure can become a self-fulfilling prophecy. In an essay titled “Riding the Shirtsleeves: Deconstructing a Foundational Family Business Myth,” Jaffe notes the stifling effect this thinking can have on the next generation. Put simply, if a founder expects that the family business will likely fail within three generations, the succeeding generations may not be empowered to make meaningful contributions.
Jaffe writes “By focusing on what can go wrong—which is certainly possible—the shirtsleeves myth diverts attention from another, more promising dynamic: seeing the treasure and value in the human, intellectual and spiritual capital of the ‘rising’ generation (Jaffe, 2015).” This can result in lower levels of familial trust, a lack of innovation and new ideas from the younger generation, or talented family members leaving to pursue more fulfilling opportunities.
To counter this, Jaffe argues that the founders would be better served by considering how to invite the younger generation to be their partners and “how they [the senior generation] begin to change their role from controlling owners to generative mentors (Jaffe, 2015).” Welcoming the contributions of the next generation while building entrepreneurial practices can help the family succeed into future generations.
Conclusion
Statistics like the 30-13-3% case represent interesting snapshots in time. While they are often used as a cautionary tale, they can also mislead, scare, and paralyze a family firm into thinking that business failure is inevitable.
Rather than worry that this statistic becomes your fate, focus on stewardship of the family and business. Look at your enterprise from an entrepreneurial viewpoint and consider how the succeeding generations can contribute to the success and legacy of the family. What entrepreneurial, philanthropic, and family frameworks will serve future generations, regardless of whether any particular operating business stays with the family?
References
Aronoff, Craig, (Retrieved June 1, 2017). Family Business Survival: Understanding the Statistics. Family Business Consulting Group, https://www.thefbcg.com/assets/1/7/FBA_Family_Business_Survival-Understa...
Jaffe, Dennis (2015). Riding the Shirtsleeves: Deconstructing a Foundational Family Business Myth. Dennisjaffe.com, http://dennisjaffe.com/download/riding-the-shirtsleeves-deconstructing-a...
Lee, James (2015). Myths and Realities of the Family Business. Tharawat Magazine, https://www.tharawat-magazine.com/sustain/myths-and-realities-of-family-...
Sharma, Pramodita (2014). Evolution in Thinking About Generational Transition in Family Enterprises. Family Firm Practitioner, https://ffipractitioner.org/2014/06/11/evolution-in-thinking-about-gener...
Steier, Lloyd (2014). Family Advantage: Why All the Doom and Gloom? Family Firm Practitioner, https://ffipractitioner.org/2014/02/26/family-advantage-why-all-the-doom...
Ward, John (1987). Keeping the Family Business Healthy: How to Plan for Continuing Growth, Profitability, and Family Leadership. Jossey-Bass Publishers, San Francisco
Zellweger, T. M., Nason, R. S., & Nordqvist, M. (2012). From Longevity of Firms to Transgenerational Entrepreneurship of Families: Introducing Family Entrepreneurial Orientation. Family Business Review, 25(2): 136-155.
