Family-owned firms play a major economic role worldwide. Only in Canada, family firms employ over 6 million people and contribute more than 60% of our GDP according to the Family Enterprise Xchange.
You probably know many family firms, from the small grocery store around the corner to some of the world’s largest companies. BMW, IKEA, Walmart, and, closer to home, Bombardier are just a few examples.
While some family firms thrive for several generations, others are short-lived. “On average 30% of family firms are passed to the 2nd generation, and only 12% of them make it to the third generation,” explains Telfer School of Management Professor Peter Jaskiewicz.
Professor Jaskiewicz and his research team wanted to understand why such a significant group of family firms fails so early. He started looking for answers by examining the unique nature of family firms. Unlike the owners of nonfamily firms, those who run a family business often wish to pass it on to next-generation family members.
“We wanted to find out if this particular desire to keep the business alive for several generations, what we call the transgenerational intention, was good for firm performance, and our results were really intriguing.”
It appears that when families strongly desire to pass on the business to their children, family-firm performance declines. Their findings have been published in the top journal Entrepreneurship Theory and Practice.
“My kids are the smartest and best looking of all”
It is common for parents to consider their children the smartest and best looking of all. Unfortunately, in the context of family firms, when the current owners are very eager to pass on the business to the next generation, a bias towards their children does not usually lead to the best business decisions.
When involving their own children in the firm, current owners should ask themselves if their desire to pass on their business is clouding their judgement and ability to make the right decision for the firm. Are their children as competent as a highly educated and experienced professional manager who is not a member of the family? If their children underperform or prove unsuited for the position, will they be fired?
“These biased decisions might put current owners at odds with strategic decision-making,” adds Professor Jaskiewicz.
The threshold: when family managers can hurt the firm
Professor Jaskiewicz and his team show that future firm performance tends to be lowered when more than 25% of the executives are family members and the current owners have a strong desire to pass on the firm to the next generation.
“In family-owned firms with a strong desire to pass on the business to the next generation, increasing the number of family managers from one to two in a three-person management team is likely to reduce the firm’s future profitability by about 20%,” says Professor Jaskiewicz.
When the desire to pass on the torch has a positive impact
Professor Jaskiewicz and his team recognize the benefits of transgenerational intention in family firms. “When planning to pass on the business to their children, family owners are more likely to make careful, long-term investments so that the business will be in good shape 20 or 25 years down the road,” he explains.
Interestingly, his study further shows that family-owned firms with a majority of nonfamily managers are most likely to achieve the best performance when family owners desire to pass the business to the next generation.
Advice for the current owners of family firms
Professor Jaskiewicz advocates for transgenerational intention as long as it goes hand in hand with a non-family executive suite that manages strategic decisions along the way.
“Current owners of family firms need to realize that, when non-family executives are encouraged to make long-term investments, they are definitely an asset. Non-family managers are better positioned and less biased in making decisions that involve the owners’ family members,” says Professor Jaskiewicz.
He also advises family-owned firms to “keep a balance between a transgenerational intention and the rational decision-making that non-family managers can offer.” This way, the family firm is likely to be passed on in good health to the next generation(s).
Hoffmann, C., Jaskiewicz, P., Wulf, T., and Combs, J. (2017). The Effect of Transgenerational Control Intention on Family-Firm Performance: It Depends Who Pursues it. Entrepreneurship Theory and Practice.