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What's the True Family Business Survival Rate?

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The oft-quoted statistic says that only 3% of family businesses survive three generations. But that's necessarily the case.

There's an infamous statistic about family businesses, still the predominant form of ownership among construction firms, that about how only 3% survive through three generations. In fact, the statistic is out there like gospel in the business press. I get a Google notification each day when a news article using the term “The Family Business Institute” appears, and this statistic is often incorrectly attributed to us! I have no idea why, and when reporters call and say, "You say…" I gently inform them that we did not generate it nor do we utilize it in our work with contractors. The reason is that there are at least four troublesome issues with the widely accepted statistic that bear discussion.

First, it's old! It originated with family business consultant Dr. John Ward around 1987 and was based on a very small group of manufacturing companies that he surveyed. The information has been extrapolated across all family businesses around the world for all these years, but it's pretty darn old, and one must question its validity in today’s world.

Next, it comes from a limited data set of manufacturing companies in Illinois. Are manufacturing companies’ success and failure rates directly comparable to construction firms? Maybe, but maybe not.

The third thing is that commentators mix up the words “to” and “through.” Dr. Ward reported about companies that survived through generations one, two, and three. Most speakers or writers instead say the businesses survived to a certain generation. That's a pretty big difference! If a closely held company can survive through a generation, that adds 20 or 25 years to its business lifetime.

Finally, the term “survive” is problematic. What does survive mean; how is it defined? For example, I sold The Family Business Institute to Travelers Bond in 2017. While I don't technically own the company anymore, we have certainly survived and prospered. If we apply the statistic as generally used, however, then this company would be counted as a failure because we're not technically a family- or closely held business anymore. There are, in fact, many alternatives to keeping a business in a family or in the hands of a very small group of people. Suppose, for example, that your construction firm is very successful and that one day you branch out into real estate development. Over time, the real estate development business becomes your primary focus. Would the legacy construction company be considered a failure because you deemphasized that aspect of your enterprise? Even though you may be just as healthy and wealthy in another line of work, your construction firm, according to the way this definition has been traditionally utilized, might be considered a failure. You could enjoy spinoffs or divestitures of the construction firm, and you could even sell it to the non-family executives who helped make it successful in the first place, which happens with great frequency in this industry. As you can see, there are lots of flaws in the way this often-quoted survival statistic is deployed.

What we can definitively say after 30+ years of working with contractors is that it is very, very, very difficult for any business to succeed through multiple generations. It's nearly impossible to stay on top. If you were to go back and review the companies profiled in Jim Collins’ business bestsellers Built To Last and Good To Great, you would find that even the featured household-name companies with their armies of MBAs, CPAs, attorneys, and analysts have struggled over time to retain their luster. Businesses grow, plateau, decline, and fail in cycles that no one, if we’re truly honest with ourselves, can predict.

So what’s the “survival rate” for contractors? No one has a legitimate statistic. What we do know is that the best, most progressive construction companies share at least 10 practices that contribute to their lasting prosperity. You can download our Research Paper The Top 10 Reasons Contractors Succeed to learn more.

Wayne Rivers is the president of The Family Business Institute, Inc. FBI’s mission is to build better contractors! Wayne can be reached at 877-326-2493, [email protected], or on the web at www.familybusinessinstitute.com.

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