The saying “wealth never survives three generations” has long shaped discussions around family businesses. Often referred to as the “30-13-3 rule,” it suggests that only 30% of family businesses survive into the second generation, 13% into the third, and a mere 3% endure beyond that. This idea implies a cycle in which the first generation builds the business, the second maintains it, and the third—often characterised as lacking the drive or skill—loses it. While this concept may be rooted in historical research, such as John Ward’s studies on family businesses in the 1980s, it raises the question: does this notion still hold in today’s environment of evolving family enterprises and robust wealth management practices?

Challenging the “Three Generations Rule”

The origins of the “three generations rule” are often misinterpreted. In fact, John Ward’s 1980s study on family-owned businesses in Illinois found that only one-third of these businesses survived into the second generation, but this survival spanned approximately 60 years, not the commonly quoted 30. The widespread belief that most family businesses fail by the third generation overlooks key nuances, including the fact that many businesses are sold or restructured voluntarily, not out of failure.

Moreover, this myth does not provide a fair comparison to publicly traded companies, which often have much shorter lifespans. Research shows that the average lifespan of a publicly traded company is around 15 years—much less than a single generational cycle (Daepp et al., 2015). In contrast, family businesses tend to endure longer, particularly those that focus on wealth preservation strategies and robust succession planning.

Rethinking Success and Failure in Family Businesses

To better understand the generational success of family enterprises, it’s crucial to reconsider how we define failure. As families expand their portfolios and engage in activities beyond a single operational business, a more holistic approach to wealth management is necessary. Instead of viewing the sale of a family business as a failure, we should recognise that many families diversify their wealth into new ventures, philanthropic efforts, or sustainable investments. The decision to sell a business can be part of a broader wealth transfer strategy, as families explore new opportunities for growth and legacy building.

Research supports this more nuanced view of wealth dynamics. Gregory Clark’s work on social mobility shows that wealth, whether held by affluent or less affluent families, tends to persist across many generations—often far beyond the third (Clark, 2013). This suggests that strategic wealth management, combined with next-gen wealth education, can ensure the preservation of wealth and values over time.

Moving Toward a Family Enterprise Mindset

Rather than focusing solely on the business itself, the concept of “family enterprise” encompasses the entirety of a family’s wealth, values, and legacy. This perspective expands beyond just the company to include the family’s philanthropic efforts, real estate investments, cultural assets, and other ventures. By adopting this model, families can strengthen their family governance and protect their wealth across generations.

Passing on a family business is no longer just about handing over the reins to a single enterprise. As Trümmel, Wilmes, and De Massis (2023) highlight, legacy transmission is achieved through both tangible and intangible exchanges between generations. Families that prioritise the transmission of values, heritage, and social influence—alongside wealth—are more likely to succeed in preserving their legacy.

Striking a Balance Between Agency and Stewardship

A key challenge for family enterprises lies in balancing agency—the pursuit of individual entrepreneurial success—and stewardship, which focuses on preserving family wealth and values for future generations. While agency promotes innovation and short-term growth, stewardship emphasises the long-term vision of maintaining family cohesion and sustaining the family’s wealth.

To find a balance, families should implement family governance systems that foster both entrepreneurial spirit and a commitment to the family’s broader legacy. This includes setting clear roles, transparent decision-making processes, and conflict resolution mechanisms. Family office consulting services can support this by helping families align their business and personal goals.

The Importance of Family Governance

A robust family governance framework is essential for long-term success, particularly when managing multi-generational wealth. Family governance consulting provides tools for clear role definitions, transparent decision-making, and structured succession planning. These systems are crucial in resolving potential conflicts and ensuring family harmony as the business evolves.

Family governance structures should be adaptable, growing with the family’s needs. Regularly reviewing governance frameworks ensures they remain relevant and effective as the family expands. Additionally, involving professional advisors, such as legal and wealth management experts, is critical to ensuring compliance with regulatory and tax considerations while protecting the family’s wealth.

A New Perspective on Generational Transitions

The notion that the third generation inevitably fails no longer applies to modern family enterprises. This outdated concept overlooks the complexities and successes of multi-generational wealth management. By adopting a family enterprise approach and focusing on next-generation education, legacy transmission, and effective family governance, families can build a lasting legacy that spans multiple generations.

Successful families prioritise values, vision, and long-term stewardship, creating a cohesive family identity that extends beyond just business operations. With the right governance frameworks, family offices can effectively manage wealth transitions and ensure that the third generation—and beyond—is equipped with the tools to thrive.

Conclusion

Dispelling the myth of the “third generation failing” requires a broader understanding of how modern families manage wealth and legacy. Family offices and enterprises that prioritise comprehensive governance, intergenerational communication, and a holistic view of wealth can ensure longevity far beyond the third generation.

FAQs

What is the “three generations rule” in family businesses?

The “three generations rule,” also known as the “30-13-3” statistic, suggests that family wealth rarely survives beyond the third generation. However, this rule is based on narrow research and does not fully capture the evolving dynamics of family businesses and wealth management.

What is the difference between a family business and a family enterprise?

A family business typically refers to a single entity generating wealth. A family enterprise, however, encompasses the full spectrum of a family’s ventures, including businesses, philanthropic efforts, and other assets.

What role does family governance play in sustaining family enterprises?

Family governance provides a structured framework for decision-making, conflict resolution, and succession planning. By aligning family goals with business objectives, governance ensures long-term continuity and family cohesion.

What is the role of stewardship in family businesses?

Stewardship refers to the responsibility of preserving family wealth, values, and legacy for future generations. It contrasts with agency, which focuses on short-term individual decision-making. Families that emphasise stewardship prioritise long-term planning and the protection of assets to ensure the sustainability of their legacy.

How does estate planning for high-net-worth families differ from standard estate planning?

Estate planning for high-net-worth families involves more complex structures such as trusts, family offices, and tax-efficient wealth transfer strategies. It often requires international tax planning, asset protection measures, and succession strategies tailored to multi-jurisdictional family businesses or investments.

References

  • Clark, G., 2013. What is the True Rate of Social Mobility? Evidence from the Information Content of Surnames. University of California, Davis. Available at: https://doi.org/10.2139/ssrn.2346824 [Accessed 16 October 2024].
  • Daepp, M.I.G., Hamilton, M.J., West, G.B., and Bettencourt, L.M.A., 2015. The Mortality of Companies. Journal of the Royal Society Interface, 12(107), p.20150120. https://doi.org/10.1098/rsif.2015.0120.
  • Trümmel, P., Wilmes, R., and De Massis, A., 2023. Intergenerational Exchanges in Entrepreneurial Families and How They Shape Legacy Transmission. In: Academy of Management Proceedings, Vol. 2023, No. 1, p.14637. Briarcliff Manor, NY: Academy of Management.
  • Ward, J.L., 2011. Keeping the Family Business Healthy: How to Plan for Continuing Growth, Profitability, and Family Leadership. New York: Palgrave Macmillan.