Why Do Only 12% of Family Businesses Reach the Third Generation?

Family businesses are an important part of India’s economic and cultural landscape. From small local shops to large conglomerates like the Tatas and Birlas, family-owned enterprises have been shaping our country for generations. However, research suggests that only about 12% of such businesses manage to survive and thrive till the third generation. This article explores why this happens, what goes wrong by the time the third generation takes over, and how future generations (Gen Z, Gen Alpha, and Millennials) might handle family businesses in India.

1. The Three-Generation Rule in Family Businesses

The popular saying goes: “The first generation builds the business, the second generation grows it, and the third generation destroys it.” Although this may seem extreme, it highlights a common pattern where most family businesses struggle to pass the baton successfully by the third generation.

Key Reasons Behind This Pattern

1. Lack of Proper Succession Planning: Many Indian family businesses do not have a clear plan for who will take over leadership roles. They often assume that children or close relatives will simply “step up,” but without proper training or mentorship, these successors may not have the skills needed to run the company effectively.
2. Family Conflicts: Disagreements and power struggles among siblings or cousins can fracture unity and cause serious disruptions. When the business is led by multiple family members, personal disputes can overshadow professional decision-making.
3. Different Aspirations: The first generation often starts with passion and drive. The second generation might still have respect for this hard work and a sense of responsibility. By the time we reach the third generation, family members may have different dreams, or they may be less motivated to continue the traditional family business.
4. Changing Market Conditions: As each generation passes, the market evolves. If the heirs do not adapt to new technology, digital trends, or changing customer demands, the business can quickly become outdated.
5. Over-reliance on Legacy: Sometimes, the founding generation’s reputation and goodwill keep the business afloat. By the time the third generation arrives, that legacy might fade unless renewed efforts are made to maintain or reinvent the brand.

2. Indian Examples and Lessons

India has some remarkable success stories where family businesses have passed on through multiple generations. For instance, the Tata and Birla groups have survived and grown over a century because of strong governance, professional management, and continuous innovation. In contrast, many smaller family businesses in India—like traditional textile shops, sweet shops, or small-scale manufacturing units—often fail to go beyond the second generation.

Lessons from Successful Family Businesses:

1. Professional Management: Hiring qualified, outside professionals can bring fresh perspectives and reduce family tensions.
2. Succession Training: Many top family-owned conglomerates ensure that successors study or train in reputed institutes and learn the ropes from a young age.
3. Clear Governance Structures: Establishing boards of directors and advisory councils can ensure that no single person holds all the decision-making power.

3. Why the Third Generation Struggles

3.1 Loss of Founding Spirit

The first generation builds the business with passion and personal sacrifice. The second generation sees this dedication firsthand. But the third generation, growing up in relatively comfortable surroundings, may not share the same urgency or personal connection to the business legacy.

3.2 Family Expansion and Ownership Dilution

By the time the third generation arrives, the family may have grown, and ownership could be spread among many relatives. This can lead to conflicts over shares, voting rights, and strategic decisions.

3.3 Mismatch of Skills and Interests

Not every child or grandchild will have the interest or talent to run a business. Some might want a completely different career path, while others may be forced into the business without proper training.

4. The Role of Gen Z, Gen Alpha, and Millennials

In today’s world, younger generations—Millennials (born roughly 1981–1996), Gen Z (1997–2012), and the upcoming Gen Alpha (2013–2025)—have grown up with technology, global media, and diverse career options.

How They Differ from Previous Generations

1. Tech-Savviness: They are more comfortable with the internet, social media, and digital tools, which can help modernize family businesses.
2. Global Outlook: Younger Indians often study or work abroad, or at least have exposure to global trends, helping them bring fresh ideas to local ventures.
3. Desire for Autonomy: They value personal freedom and may question traditional business methods. They are open to innovations, but also more likely to leave if they feel confined.

Will They Take the Business Forward?

• Greater Adaptability: With the right mentorship and freedom to innovate, these generations might be exactly what family businesses need to adapt and survive.
• Risk of Disinterest: However, if the younger generation does not see growth or if they find the environment too restrictive, they may walk away to pursue other careers or entrepreneurial ventures.

5. What Happens When the Third Generation Cannot Continue?

When the third generation decides not to continue or fails to keep the business profitable, several outcomes are possible:

1. Sale or Merger: The family might sell the business to another firm or merge with a bigger competitor.
2. Professional Management Takeover: The owners could stay as shareholders but hand over day-to-day operations to a professional CEO or management team.
3. Closure: In the worst-case scenario, the business shuts down entirely if it becomes unprofitable or too complicated to manage.

6. Ensuring Longevity: Tips for Indian Family Businesses

1. Plan Early: Identify potential successors and start training them early. Involve them in decision-making in small ways before giving them major responsibilities.
2. Establish Clear Rules: Write down rules for ownership, inheritance, and leadership positions. Family charters or constitutions can help reduce confusion and conflict.
3. Open Communication: Encourage regular family meetings to discuss both personal and business issues. Honest dialogue can prevent misunderstandings.
4. Consider Professional Help: Employ external consultants or board members with industry expertise. This can bring new ideas and maintain objectivity.
5. Encourage Education and Exposure: Let younger family members gain experience outside the family business—through higher studies or work in other companies—before they join. This broadens their perspective.
6. Embrace Innovation: Stay up-to-date with market trends, technology, and consumer preferences. Gen Z and Gen Alpha can lead the way here if given the chance.

7. Conclusion

The statistic that only 12% of family businesses survive to the third generation may sound alarming, but it does not have to be a guaranteed fate. With proper succession planning, strong governance, open communication, and a willingness to adapt, Indian family businesses can beat the odds.

Younger generations—Millennials, Gen Z, and the emerging Gen Alpha—bring fresh energy, global awareness, and technological expertise that can help renew and reinvent longstanding family enterprises. By respecting tradition while embracing change, Indian families can ensure that their businesses thrive well beyond the third generation and continue to shape the future of our nation’s economy.

Comments

comments