The preliminary results of a study commissioned by the Family Firm Institute, soon to be published in Family Business Review, provide a new framework for analyzing the longevity of a family business and its ability to create transgenerational value. The study, From Longevity of Firms to Transgenerational Entrepreneurship: Introducing Family Entrepreneurial Orientation,1 suggests focusing on the family
The preliminary results of a study commissioned by the Family Firm Institute, soon to be published in Family Business Review, provide a new framework for analyzing the longevity of a family business and its ability to create transgenerational value. The study, “From Longevity of Firms to Transgenerational Entrepreneurship: Introducing Family Entrepreneurial Orientation,”1 suggests focusing on the family itself and its entrepreneurial orientation, rather than on a particular family business, in assessing whether the family's business activities create or destroy wealth through the generations.
In 1987, Professor John Ward, currently at Northwestern University, conducted the seminal family business longevity study. Ward looked at survival rates of 200 family businesses engaged in manufacturing in Illinois. He found that only 30 percent of them survived through the second generation, and 13 percent survived through the third. This study established the central dilemma for the majority of family business academic research and advisory practice over the last two decades: How to foil the three-generation survival trap for family businesses.
But, should preserving a specific family business for more than three generations actually be the goal? No, according to the new study, which stresses that Ward's focus on the survival of a specific family firm is fundamentally flawed.
The new study explores how families become drivers of entrepreneurial growth over time. More specifically, its goal is to outline a new conceptual approach that focuses on the family unit, rather than a particular family firm, when analyzing the longevity and transgenerational value creation of entrepreneurial families.
The authors of the new study believe that introducing such a perspective is timely because existing studies tend to neglect the portfolio of entrepreneurial activities of business families beyond a single core company. In addition, most traditional longevity studies fail to acknowledge other forms of succession beyond passing the business within the family, such as the sale of a firm as a way to harvest value and create new entrepreneurial opportunities for the family.
Given these goals, the study seeks to answer two main questions:
- To what degree do business families engage in entrepreneurial activities beyond the core firm and dynamically adapt their portfolio of business activities over time? and
- What attitudes do these families exhibit towards entrepreneurial activity?
The study looked at 118 business families, primarily located in North America. The mean age of the families' core company was 60.2 years, with the third generation currently being in control. On average, the annual sales volume of total business activity by these families was $173.7 million. The mean number of fulltime non-family employees in these activities was 491, along with four family employees. The mean ownership stake was 93.4 percent.
Regarding the degree of family entrepreneurial activity beyond the core firm, the results were striking. Only 10 percent of respondents controlled a single firm. In fact, the mean number of businesses currently owned by the families was 3.4 firms (although the core company accounted for, on average, roughly three quarters of total sales of the family-controlled business activity). On average over their history, these families controlled 6.1 firms, created 5.4 firms, added 2.7 firms through merger and acquisition activity, spun off 1.5 firms and shifted industry focus 2.1 times. The statistics show that the families exhibit a significant level of entrepreneurial activity over time, in terms of rearranging the family business portfolio through founding businesses, engaging in mergers and acquisitions and divesting businesses.
What about the second goal of the study, to analyze what kind of attitudes business families exhibit towards entrepreneurial activity? The authors define “family entrepreneurial orientation” as the attitudes and mindsets of families to engage in entrepreneurial activities. They argue that to determine a family's entrepreneurial orientation, you need to combine attributes that are prototypical of the family domain — such as interdependency, stability and transgenerational outlook — with attributes of entrepreneurship that are typical of the business domain — such as change, innovation and risk orientation. Thus, the notion of family entrepreneurial orientation captures the sometimes contradictory attributes of business and family. Although these different attributes seem inconsistent on their face, in reality, successful business families embrace both to create synergies that don't exist in non-family businesses.
An important element of a family's entrepreneurial orientation is a family's “transgenerational entrepreneurial orientation.” This concept includes elements typically assigned to the business sphere, such as creating new firms and also includes the family element of decisionmaking with the next generation in mind. Families are willing to foster change and growth of business activities, but they do so for the benefit of the next generation, and not solely for the immediate benefit of the current owners. Looked at through the lens of a family's entrepreneurial orientation, and in particular, through transgenerational entrepreneurial orientation, the families in the study that proved successful at creating value across generations were able to simultaneously accommodate paradoxical family and business orientation.
The implications of the study for family business advisors are threefold. First, by shifting the level of analysis to the family and away from a particular business, business families can decouple family and firm life in a way that may lead to the creation of new streams of value over time. Seeing a family's entrepreneurial orientation as a critical element of transgenerational value creation, it may be helpful to shift a family's self-understanding from controlling a “family business” to being an “entrepreneurial family.”
Second, the study offers an alternative approach to the often contentious process of succession in family firms. Those firms that view the family as a wealth creation vehicle and strive to create new businesses over time may be able to move beyond the succession model, which is based on identifying the single most competent heir to become the CEO. Rather, when there are multiple firms or the opportunity to create new firms, there are also multiple leadership roles for the next generation of family members. The next generation may take over the core family firm, but they may also start a new firm, create value by developing a philanthropic arm or lead a major new initiative within the family firm.
Third, those who wish to intentionally integrate entrepreneurial behavior into their business families need to find mechanisms and structures that facilitate this in a way that's not tied to a single firm, for example, by creating an internal fund or family-controlled holding company as an incubator for new ventures.
This study represents a giant step forward in the evolution of understanding successful multi-generational business families. By focusing on the entrepreneurial attitudes of the family as opposed to a single-family business, the authors create an optimistic new framework for how entrepreneurial families can succeed through the generations.
- Thomas Zellweger, Robert Nason and Mattias Nordqvist, “From Longevity of Firms to Transgenerational Entrepreneurship: Introducing Family Entrepreneurial Orientation” (available in draft form on Google Scholar).
David Thayne Leibell is a partner in the Greenwich, Conn. and New York City offices of Wiggin and Dana LLP