by Ken McCracken

The demographic reality for most business families is that their enterprise has to grow and diversify to support the needs and ambitions of a growing family. 

Is the family a problem?

Some argue that the biggest obstacle to achieving multi-generational success is the family itself.  Instead of diversifying by developing their core business or investing in new ventures and asset classes, the next generations consume wealth and use the advantages it bestows to pursue other goals, such as social or political distinction. Starved of investment, the family enterprise declines.

On a related note, when a business or other type of fortune has been inherited no one wants to risk losing it, so often playing safe and pursuing cautious growth dominates. This approach is endorsed by advisers who focus on creating structures to preserve wealth rather than to encourage the type of entrepreneurial risk taking that created the family’s wealth in the first place.  

Ironically this is likely to increase the risk of a clogs-to-clogs denouement over the span of three generations because the needs of a growing family eventually outstrip the financial capacity of their enterprise.

While the family can be the source of failure, it can also provide the potential for success, with many achieving multi-generational entrepreneurial success.

It is all about the family

A family decides that they want a business to support their growing family up to generation 3.  This family ambition leads to;

  1. a long-term investment horizon, which is different from the return expected by other types of businesses nowadays; and 

  2. a growth target for the business, which is to expand to provide the desired overall return for an increasing number of family members.

Note that the focus is on the family ambitions and growing the business is in service of the family’s goals. Focussing on the ambitions of the family helps prevent an obsession with the continuity of a particular business as the most important measure of success for family enterprises.

The cult of continuity

The cult of continuity is expressed through claims about the proportion of family businesses that survive the transition between generations.  It is a story told through the narratives of clogs to clogs and shirtsleeves to shirtsleeves. This concern with the continuity of a particular business suggests that the failure by many to survive and the associated   diversifying of ventures is failure. It isn’t.  Some family enterprises do not transition because the family does not want this. They decide to sell or liquidate their business and start other ventures or they set up a family office to look after the collective wealth of the family. 

There are two other ways in which the continuity focus misrepresents reality. The first is that it does little to explain the achievements of families who survive for generations by meeting the challenge to change, develop and diversify their business in response to market conditions. These families might still appear to own the same business, but it is not the same business as before. 

Secondly it does not account well for the families who still own what could be called their ‘original’ business but who have also diversified into a range of other assets and activities. Why celebrate the legacy business and ignore the family’s wider achievements?

Remember it is all about the family

This point is worth repeating. The way a family diversifies their enterprise depends on the type of family they are and what they want to achieve as a family. This reiterates the need to stop focussing on the business and start paying more attention to the family as the emotional and economic unit that drives diversification.  Clearly families want to nurture, preserve and protect their wealth but they also know that they cannot look after a growing family by maintaining the status quo.

Strategic nepotism

This is a way of diversifying a family enterprise that will not make sense to other types of business, which is merely further proof that family enterprises are not like other types of business. It is where a family decides to diversify by backing the savvy in their lineage.  


The decision to do this might be because the next generation does not want to take over the business started by their ancestors, but still want to remain in business together, so there is a family need to diversify.  The catalyst might also be the desire to give the next generation an opportunity to pursue their own business ideas and experience establishing and growing a business. These families believe that the best way to learn about business is to run your own.


It is a clear distinction between a strategic decision to diversify by investing in a particular type of business or asset compared to investing in the interests and talents of a family.  


For example, one family’s decision to invest in renewable energy had more to do with the next generation’s environmental interests than the family choosing green energy over other sectors for strategic business reasons. No doubt the family considered the financial risks of their diversification strategy, but their investment was made easier because they felt more comfortable supporting the ambitions of relatives compared to investing their wealth with strangers. 


Another family’s approach to diversification was to raise a fund that provided seed funding for ventures that were developing new technologies that either might be useful to the family’s core business or which could benefit from the core business’s other resources, such as access to distribution channels and international trade connections. 


This was the idea of two family members who wanted independence to do something on their own while remaining useful to the core business and the wider family. Their motivation was the familiar challenge of the next generation trying to find a way to pursue their own aspirations while dealing with their feelings of loyalty and duty to their family.


While family members were invited to invest in the fund it was agreed that the family business itself would not be an investor. It did however, support companies in which the fund invested, with infrastructure including incubator premises and access to the business’s network of contacts.  If any of the investees produced technology of use to the family business it would seek to obtain a licence or even acquire the start-up, both on arms’ length terms.  


By doing this the family helped the business outsource some research and development through ventures supported by a fund that was started by family and supported by family who saw this as a good investment opportunity. 

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