Family business longevity examined in a new light

Survival statistics have often been used to equate business exit with failure. That limited perspective doesn't consider a family's role as wealth creators.

Family business longevity examined in a new light

By Barbara Spector

In this issue, we celebrate the longevity of America’s oldest family businesses—companies that have been continuously owned by the same family for 155 years or more. Sustaining a family enterprise for more than a century and a half is a truly remarkable achievement. But does that mean family companies that last for only two or three generations are a failure? Should we consider families who have exited their businesses as less accomplished than those who continue to operate the legacy company—even if those who sell their businesses use the proceeds to create new, and greater, wealth? Why is business longevity so often viewed as the only meaningful measure of an enterprising family’s success?

A three-year study conducted under the auspices of the Family Firm Institute—a global association of researchers and advisers—aimed to reframe the view of family enterprise from a focus on operating companies to an assessment of value creation over time. The “FFI/Goodman Longevity Study,” completed in 2010, was conducted by Robert Nason, who was then at Babson College and is now pursuing a Ph.D. in entrepreneurship at Syracuse University, along with two European researchers: Mattias Nordqvist of Jönköping International Business School in Sweden and Thomas Zellweger of the University of St. Gallen in Switzerland. The study was funded in part by attorney and FFI member Joe Goodman. It will be published in a forthcoming issue of the field’s academic journal, Family Business Review.

Putting statistics in context

The investigators re-examined frequently quoted statistics from a 1987 study by John L. Ward, now at the Kellogg School. Ward’s nearly quarter-century-old report said that only 30% of family companies survive through the second generation, and just 13% make it through the third. Ward himself has acknowledged the limitations of that study, Nason and Nordqvist noted in a presentation at FFI’s 2010 annual conference in Chicago. Ward surveyed just 200 companies from only one state (Illinois) and only one industry (manufacturing).

Moreover, the researchers noted, Ward’s family business findings should be compared with longevity statistics for companies in general. Based on an assessment of U.S. Census data on start-ups founded in 2000—both family and non-family businesses—50% to 60% of all companies failed in the first five years, and only 25% lasted a decade. “[Ward’s] oft-cited survival statistics are low, out of context and not generalizable,” Nason and Nordqvist asserted in their presentation.

The FFI/Goodman team circulated an online questionnaire to senior family firm executives and received 541 responses, which they winnowed to 118. About 70% of the respondents were from the U.S. The survey participants’ annual revenues ranged from less than $1 million to $3 billion; the enterprises ranged in age from less than 20 years to 384 years (the mean was 60 years).

Challenging traditional assumptions

The study found that just 10.6% of the family enterprises owned only one business. The average number of companies controlled by these families was 3.4; 21.3% controlled five or more. Over the history of the participating families, they had owned an average of 6.1 firms. The investigators noted that research in the field has traditionally centered on firms founded by families and has not sufficiently addressed companies acquired through M&A; the families in their study added an average of 2.7 companies via acquisition.

Nason notes that since nearly 90% of the families in the study population own multiple businesses, shuttering one family-owned company would not spell the end of those families’ wealth-creating activity. “They’re divesting underperforming assets and redeploying them,” Nason notes. In other words, these successful families have business “failures” in their history.

The findings, the investigators pointed out, indicate that the key wealth creation vehicle is not the firm but the family.

Moreover, the researchers noted, companies can be old but not entrepreneurial. A number of the historic firms on the Family Business 100, for example, have survived but not grown; in fact, several have contracted over the years.

The FFI/Goodman team noted that previous studies have not adequately addressed the importance of innovation and risk taking to family firms’ entrepreneurship and longevity. Another important component is what they call “transgenerational entrepreneurial orientation,” or “decision making with the success of the next generation in mind.”

In a 2002 article (Family Business Review, 15[3]: 223-38, 2002), researchers Timothy G. Habbershon and Joseph Pistrui wrote, “Families committed to transgenerational wealth must understand that markets inevitably change and that all asset-dependent advantages erode over time…. Transgenerational wealth, therefore, embodies an implicit assumption that the family ownership group will develop entrepreneurial change capabilities in line with the inevitable need to shed or redeploy assets once its value-creating properties approach exhaustion.”

Habbershon and Pistrui contended that a “prevailing stereotype” exists in the family business arena: “diversifying assets through a sale (even at a premium) or utilizing traditional growth strategies—going public, forming a strategic alliance, merging, leveraging the company—can be viewed as a failure rather than a step toward continued wealth creation.”

In other words, Nason says, the focus of family business owners and their advisers should be on sustainability of the family’s wealth, not on longevity of a particular operating entity.

Families with a transgenerational orientation view the legacy company broadly rather than narrowly. Though they lovingly tell their children tales of the original business model and the town where it first took root, those aspects are just part of the family story. They place their emphasis on the founder’s entrepreneurial spirit, attention to the marketplace, flexibility and sense of stewardship. This perspective raises the odds that the family will prosper as an economic unit over many generations, no matter what form its wealth-creating entities take.