The Importance of Entrepreneurship in Family Businesses

Among North American businesses a surprising figure of almost 80% are family owned and run. However less than 60% of these survive into the second generation of the founding family, and a mere 12% survive under the control of the family’s third generation members.

A general pattern in family business can be stated in this way: The founder and the first generation start the business, determining its original focus and setup.

The 2nd generation moves into the existing business structure and function as management. Changes and innovations are less rapid than those that were needed to start the business. Professor Matt Allen of the Entrepreneurship Division at Babson College points out that family businesses are characterized by efforts on the part of ownership to balance financial performance with maintenance of family control and benefits for future generations. This balancing act, though crucial, is nonetheless detrimental to focusing on planning the next steps.

By the 3rd generation the world is vastly different than it was two generations ago, but the business has become tradition bound. Inevitably new technologies are being born, older ones lose their value in the marketplace or disappear altogether. The founder’s original business model is no longer viable or has become too narrow. The family itself has grown to the extent that the business cannot offer opportunities for all interested family members to play an active part. Conflicts arise among family members with regard to best practices and ideas as to where to take the business going forward.

Beyond this point the business either changes or does not survive into the next generation. An entrepreneurial mindset must be brought back. Critically, this must be larger than just passing the existing business to succeeding generations. A capacity toward innovation and the creation of new streams of wealth must be nurtured and supported.

Professor Allen notes that because family businesses focus on maintaining ownership across multiple generations, they possess unique resources that give them strategic advantages in entrepreneurial endeavors. Since top leadership positions are often filled by family members, the organization holds onto important knowledge and social connections throughout transitions in leadership. Thus family businesses have diverse networks that can be accessed in pursuit of entrepreneurial opportunities.

At this point a shift occurs from being a family business to becoming a business family, what some call an “enterprising family.” The experience, knowledge and assets gained from running the original business is used to help the next generations of family members to develop their own enterprises thus allowing expansion and the ability to sustain growing family participation.

To continue successfully, an enterprising family must perform a delicate balancing act. The needs of the younger generations must be balanced with those of the elders. Prudent and thoughtful management of assets must balance with the intricacies of family ties. And it must divide assets, resources, and leadership positions in the family and in the business ventures fairly among all family members.