How to Keep a Family Business Alive for Generations

by BTG | Jul 1, 2016 | Uncategorized

These five steps make it more likely that the entrepreneurial fire will stay burning.

The Wirsching family, whose current members include Lena, Sebastian, Andrea, Victoria and Heinrich (above), has been producing wine since the 1630s. 

PHOTO: INA BROSCH

By PETER JASKIEWICZ and JAMES G. COMBS

Updated Nov. 20, 2015 2:01 p.m. ET

Here’s a sobering fact for entrepreneurs passionate about their business creations: Most family-owned businesses lose that creative spark in subsequent generations.

The reason is that the personality traits that spur a founder to create something unique—passion, hunger, obsession and others—disappear over the years. The company either crumbles quickly or lingers on as growth sputters and the family lives off wealth accumulated by previous generations. Often, they end up pouring more and more money into the failing enterprise or treat running the business as a lifestyle choice rather than a way to bring in money.

But it’s not impossible for family businesses to keep the entrepreneurial fire burning. Some companies not only last a long time, but keep growing and evolving.

What’s their secret?

We decided to investigate that question, along with our colleague Sabine Rau from King’s College in London. We studied 21 family-owned wineries in Germany that were ready to make a generational transition. The average winery was founded 11 generations ago in the 18th century, and the oldest started passing the torch 33 generations ago in the 10th.

We interviewed the current generation’s leaders and their children, who were in the process of taking over. About half claimed to have maintained a spirit of entrepreneurship and innovation across generations, being among the first in their industry to take steps such as growing new grape varieties, introducing new products and adopting the latest production technologies.

We called the other half of the wineries “traditional.” They were stable or growing slowly, but they never claimed to be particularly entrepreneurial, and the current generation followed rather than led, only adopting new technology or entering new markets after competitors paved the way.

Our conclusion? Five factors distinguish the very entrepreneurial families from the ones that were following a well-trodden path.

1. They pass along family history. The innovative families have what we call an “Entrepreneurial Legacy” that is passed from each generation to the next: a narrative about the family’s achievements and how it survived tough times, such as the great-great-great-great-uncle who rode his horse to Paris to repurchase the family winery at auction after it was seized by Napoleon. Stories of how the family overcame theft, natural disasters, economic hardship and war are told repeatedly at the dinner table and family gatherings. They give meaning to today’s entrepreneurial actions and put current risks and problems in a broader context. It is hard to complain about losing a customer knowing your great-grandparents overcame war and starvation to build the business. In contrast, both generations in the less entrepreneurial “traditional” wineries either lacked knowledge about their history or played it down as a product of chance. They lacked pride in their ancestors’ achievements.
2. They get the youngsters started early. Entrepreneurial families immerse their children in the business from an early age. From planting and pruning vines to packing and shipping bottles, the children—and members of the extended family—are involved. These families actively resist the view that childhood is foremost a time to play and explore. Children in the traditional wineries, on the other hand, didn’t make their children work regularly in the family business, and some parents even considered it harmful. As a result, the children didn’t develop the same kind of emotional attachment to the business.
3. They insist on practical education. Both entrepreneurial and traditional families encourage secondary education. But while the traditional parents encouraged their children to find their own paths, entrepreneurial parents endorsed attending the best colleges in the world and encouraged studying topics that are relevant to winemaking, such as business and law. After college, before joining the family business, most children from entrepreneurial families went to work for competitors or in other wine-related businesses around the world. Both groups came home well educated, but only the entrepreneurial children were also multilingual global citizens, poised to grow the family business. For children from traditional firms, taking over was “an obligation” and a “family tradition,” but not an “entrepreneurial passion.”
4. They learn from the younger generation. As a result of embracing the family’s entrepreneurial legacy, childhood immersion in the business and a strategically focused world-class education, entrepreneurial families enjoy “entrepreneurial leaps” when a child comes home and re-enters the business. Traditional family firms use a “relay” succession, where the parent and child work together so the child can learn the business. In entrepreneurial families, though, the child is the teacher. The parents run day-to-day operations while the children use what they learned outside the family firm to develop new product lines, enter new markets and adopt the latest winemaking technology.
5. They have one owner. Period. Finally, entrepreneurial families protect their businesses from being sold or split by giving ownership to one child. The successor inherits a social obligation to take care of his or her siblings, but the philosophy is that the family is better off with a successful winery that benefits everyone, even if it means that the children receive unequal inheritances.

Also, because all siblings grew up the same way and were offered the same educational advantages, even those who don’t take over the family business still benefit from their entrepreneurial legacy.

In fact, siblings in entrepreneurial families regularly pursued educational paths similar to the designated successor. Although the siblings weren’t given the family business, they were given financial and emotional support for their own entrepreneurial ventures, most of which were in the same or in related areas, such as wine stores, restaurants and hotels.

A related step is that entrepreneurial families actively integrate future in-laws into the family by including them in family retreats and shared holidays. A few even hired consultants to help them improve family communications. Good relations with in-laws help cultivate the next generation of entrepreneurs, while poor relations often fuel the demise of entrepreneurial families.

Can the same strategies work in the U.S.? A number of trends may make it difficult. Families are getting smaller, as well as less cohesive and less stable—which means fewer potential successors and a tougher transition from one generation of ownership to the next. Childhood is also increasingly viewed as a time for play and innocence, not a time to work. And the idea of giving one child more than another strikes many parents as unfair.

Still, families can share stories, and the evidence we found suggests that telling and retelling tales about the family’s entrepreneurial legacy inspires children toward entrepreneurship, both inside and outside the family firm. If there is an entrepreneur in your family, tell his or her story. It might become the steppingstone toward an entrepreneurial legacy that lasts for generations.

Dr. Jaskiewicz is CIBC distinguished professor in entrepreneurship and family business at Concordia University’s John Molson School of Business. Dr. Combs is Dr. Phillips Chair of American Private Enterprise at the University of Central Florida. They can be reached at [email protected].