Only the Family Business matters. Almost.

Entrepreneurs create wealth - failed succession destroys it

Two-thirds of the wealthiest families globally are self-made (1), a proportion that continued to grow over the last decade at the expense of inherited wealth. This trend seems to be largely driven by accelerated wealth creation across the emerging markets, but also by a new generation of risk-taking entrepreneurs in fast-growing sectors such as technology.

This culminates in a global challenge, as a record number of family business owners will face the challenge of arranging succession for the first time. Successful succession seems to be as hard as creating a successful business, as less than 15% of businesses make it to the hands of the third generation (2).

Conceptually, most aging business owners like the idea of having the next generation taking over the keys one day. In practice, however, it is much harder to do so, and it is not difficult to understand why. Entrepreneurs build their business around them. Why would they leave a job they enjoy, are good at, and that perfectly fits who they are as an individual?

Consequently, the topic of succession is often deferred or avoided altogether. The next generation involved in the family business increasingly grows frustrated by conflicting priorities and differing values and vision.

Succeeding in a (not the) Family Business

However, even if the family head is willing to pass on leadership, the next generation may lack interest in getting involved.  The succession-cliff seems most pronounced in China, where a more privileged second generation, often with a western education, turns sectors that are more appealing to them, such as finance, services or technology, rather than the traditional manufacturing industries of their parents.

As entrepreneurs proved it again and again, it takes passion to succeed. If the next generation is missing the drive to succeed in the existing family business, maybe it is time to think about bringing in professional external management or even to sell the business. The sale proceeds can then seed new ideas (e.g. in the form of a family venture capital fund) or finance the acquisition of an operating business within the field of interests of the next generation. Every generation can be first generation again.

Secrets of long-term Family Firm success

With so few family enterprises making it into the hands of the fourth generation, what are successful families doing differently? 

A recent study (3) with focus on Latin America shared some insights on how families created lasting value over many generations. Besides actively addressing succession planning, developing and selecting (family) talents, “institutionalization” is what distinguishes the successful established family business (4th generation or older) from younger ones, as unexciting as it sounds. In their analysis, established enterprises outperformed emerging ones in all business attributes, in particular in those related to inorganic growth, formal systems, processes, corporate governance and access to capital. Earlier surveys in Asia Pacific and the Middle East led to similar conclusions.

The decision-making process in a 1st generation family business tends to be effective but not necessarily efficient, as the founder is involved in everything. Decisions are made by one person, but it can be a bottleneck. As the business is passed on to future generations, however, efficiency requires more formal policies and procedures are required.

Remaining wealthy requires creating wealth

Why does this all matter? Simply put, inter-generational succession and entrepreneurship offer the key to remaining wealthy. 

The “impact of large numbers” was one of four key reasons we identified for why families lose their wealth over three generations. Families grow exponentially and investment opportunities that have the potential to keep up with that growth are hard to come by. Successful entrepreneurs have the highest chances to create growth that can replace increased wealth consumption of a thriving family. The most effective way to overcome that challenge is if every succeeding generation considers themselves “first generation”, with the potential to create wealth, rather than just consuming it.




(1) Wealth-X, World Ultra Wealth Report 2018

(2) Fred Neubauer and Alden G. Lank, The Family Business: its Governance for Sustainability

(3) INSEAD The Wendel International Centre for Family Enterprise, The Institutionalization of Family Firms Latin America, February 2019