Why Family Firms Rarely Survive the Third Generation — and Why Some Do

by Paolo Morosetti

What separates legacy from loss isn’t luck, but leadership and structure.

“Shirtsleeves to shirtsleeves in three generations.” It’s a saying heard in family business circles across the world—Americans use it, Italians warn dalle stelle alle stalle, and the Japanese say rice paddies to rice paddies. The idea is the same: a founder builds a business, the second generation maintains it, and the third loses it.

And in many cases, it’s true. Fewer than 1 in 10 family businesses make it to the third generation. By then, the entrepreneurial fire of the founder may have faded into formality, and unity gives way to inertia or infighting. Cousins, raised in separate households, often hold conflicting ambitions: some want to lead, others to leave. The result? Deadlock, division, or dissolution.

But the truth is more nuanced. Family firms can endure—and thrive—across generations. But survival is not automatic. It is built on structure, not sentiment.

Why Wealth Persists But Businesses Don’t

The “three-generation rule” is tidy, but misleading. Economist Gregory Clark found that wealthy families tend to stay wealthy over 10–15 generations. A study of Florentine tax records from 1427 and 2011 found that today’s richest families in Florence are the direct descendants of those at the top 600 years ago.

So if wealth survives, why not family businesses?

The answer lies not in destiny, but in discipline—especially the structures and cultures that the founding generation puts in place. Therefore, continuity depends not on fate, but on choices: how governance is designed, how power is transferred, and how conflicts are managed—or ignored.

What Culture Are You Building?

Founders tend to shape their companies along a spectrum: from family-first to business-first.

• Family-first firms prioritise harmony. Jobs go to relatives, not necessarily based on merit. Pay may be equal, regardless of performance. Boards are composed of family members and the trusted family lawyer. These firms thrive in cultures where loyalty outweighs results—but they can struggle with transparency, growth, or succession.

• Business-first firms run on merit. Family members must compete with external talent. Governance is professionalised, and boards include independent directors. Performance drives pay. This model is more common in cultures that prize accountability and discipline.

  
  

Neither model is perfect. Business-first structures may leave some family members feeling excluded. Family-first cultures can mask inefficiency or dysfunction. But when it comes to long-term survival, the business-first approach gives family firms a fighting chance. What business-first firms sacrifice in sentiment, they gain in sustainability.

Second Acts and Third-Gen Traps

Family-first businesses often flourish under second-generation leadership. Siblings raised together usually share values and a strong sense of stewardship. Their bond—and often the founder’s continued presence—helps keep conflict at bay and can fuel impressive growth.

But the third generation brings complexity. Cousins enter the scene with different backgrounds, ambitions, and loyalties. One may hold an MBA, another a grudge. One wants to innovate, another wants out. The once-close family is now a web of branches, in-laws, and unspoken tensions.

When dividends shrink and purpose fades, traditions and inertia are no longer enough to hold the group together. This is the classic third-generation trap. Belief in the “curse” becomes a self-fulfilling prophecy.

One prominent family firm was even advised by its board not to pass the business on at all. Thankfully, they ignored the advice. With a strong non-family management team to bridge the gap, the firm transitioned successfully to the next generation—who are now thriving at the helm.

The Quiet Power of Bureaucracy

Business-first firms are not romantic—but they are resilient.

They plan early for succession. They create governance structures that separate ownership from management. They bring in outside voices and expertise. Most importantly, they formalise how decisions are made and disputes are handled.

That’s not to say these firms are free from conflict. Meritocracy can bruise egos—especially when siblings or cousins find themselves on different sides of the leadership table. Reinvestment strategies may frustrate shareholders who expect quick returns.

Yet structure is a powerful antidote to chaos. Business-first firms create frameworks to manage family unity, rather than assuming it. Rules around employment, performance, dividends and succession are agreed in advance. Family cohesion becomes an intentional process—not an inherited assumption.

Thinking in Decades, Not Quarters

Roughly 10% of family businesses survive into the third generation. But those that do are not defying fate—they are executing a strategy.

They professionalise governance. They distinguish between family rights and business responsibilities. They create space for all branches of the family to feel respected—even if not all are equally involved. They invest in communication, in education, and in shared values. Above all, they think long-term.

Unlike listed companies driven by quarterly earnings, family firms can really think in decades. This long view is their superpower—allowing them to make bold decisions and weather crises without sacrificing purpose.

In conclusion

The “shirtsleeves” myth persists because it’s simple. But the truth is more hopeful—and more demanding. Family businesses fail not because of generational fate, but because they avoid the hard conversations and fail to professionalise when it matters most.

Legacy is not inherited. It’s built together through productive cross-generational dialogue. And only with the right structure, values and vision, family firms can defy the odds—and write a story that lasts well beyond three generations.

Photo credit: iStock # 698610318