Examining The Three Generation Rule Of Family Business (2024)

The 'three-generation rule' which is also known as 'shirtsleeves to shirtsleeves in three generations' posits that wealth and businesses built by the first generation are often squandered or lost by the third generation. This adage suggests that the founding generation works hard to build the business, the second generation maintains it, and the third generation ultimately squanders it.

The three-generation rule, while rooted in observation, overlooks the myriad factors that contribute to the success or failure of family businesses. Many family enterprises defy this rule, thriving well beyond the third generation.

One significant factor is the effective implementation of governance structures. Family businesses that establish clear governance mechanisms, such as family councils, boards of directors, and family constitutions, create frameworks for decision-making, conflict resolution, and strategic planning. These structures provide stability and continuity, allowing businesses to navigate the complexities of intergenerational transitions.

Another crucial element that dispels the three-generation myth is the emphasis on education and development. Family firms that invest in educating the next generation about the business, its history, and its values lay a strong foundation for future leadership. This education goes beyond formal schooling to include mentoring, hands-on experience, and leadership training. By preparing the next generation to take on leadership roles, family businesses can ensure that successors are well-equipped to manage and grow the enterprise.

The preservation and evolution of family values also play a pivotal role in countering the three-generation rule. Family businesses that succeed across generations often have a strong set of core values that guide their operations and decision-making. These values create a shared sense of purpose and identity, fostering unity and commitment among family members. As the business evolves, adapting these values to new contexts and challenges is crucial. This flexibility allows the business to remain relevant and resilient in changing market environments.

Innovation and adaptability are key to the longevity of family businesses. The three-generation rule often fails to account for the capacity of family firms to innovate and adapt to new market conditions. Successful multi-generational businesses embrace change, invest in new technologies, and explore new markets. They leverage their deep industry knowledge and long-term perspective to drive innovation while maintaining the core strengths that have sustained them. By fostering a culture of continuous improvement and adaptation, family businesses can remain competitive and dynamic.

The involvement of non-family executives and advisers can also mitigate the risks associated with the three-generation rule. Bringing in external expertise provides fresh perspectives and professional management skills that can enhance business performance. Non-family executives can help bridge generational gaps, implement best practices, and drive strategic initiatives. Their involvement can complement the family’s unique insights and commitment, creating a balanced and effective leadership team.

Moreover, the myth of the three-generation rule often fails to recognise the role of effective succession planning. Succession is a critical juncture for any family business, and those that plan proactively for leadership transitions are better positioned to succeed. This planning involves identifying potential leaders early, providing them with the necessary training and experience, and ensuring a smooth transfer of knowledge and responsibilities. Clear succession plans reduce uncertainties and help maintain business continuity during leadership changes.

Families that prioritise communication and actively work to resolve differences can maintain cohesion and a shared vision for the business. Regular family meetings, retreats, and facilitated discussions can help keep family members engaged and committed to the business’s long-term success.

There are plenty of examples of family businesses around the world that have 'outlived' the three generation rule with the oldest family firm in the UK dating back to 1515, R J Balson & Son, the butchers on the high street in Bridport where they still make sausages today on the butchers block that was used back in the time of the reign of Henry VIII.

While the three-generation rule is a popular adage, it does not capture the full complexity of family business dynamics. Many family firms successfully navigate the challenges of intergenerational transitions by implementing robust governance structures, investing in education and development, preserving core values, embracing innovation, involving non-family professionals, planning for succession, and maintaining strong family relationships.