An old adage about family businesses holds that the first generation builds wealth, the second preserves it, and the third destroys it. But the reality is far more complex - and it may be precisely the fear that the next generation will fail that can drag thriving societies into the abyss.
One person intimately familiar with these sensitive mechanisms is Prof. Matt Allen, the John L. Ward Clinical Professor of Family Enterprises and Executive Director of the Ward Center for Family Enterprises. Allen, who will be the keynote speaker at the "Globes" Family Companies Conference on Sept. 3, has been dealing for years with one of the most charged challenges in the corporate world: transferring the reins of an empire to a generation that didn't build it, all without breaking up the business - or the family.
"I grew up in a family business," Allen tells "Globes" ahead of the conference. "My father was an entrepreneur, had started a financial services firm, just a small business. And growing up, I spent a lot of time in that business. mowing the lawn, making copies, cleaning the office. And as I got a little bit older, the opportunity to be more formally engaged with the business opened up to me. I majored in accounting in order to be part of that business. I worked with him for a couple of years after I graduated from my undergrad."
"And I think that was the base", he adds. "But on top of that, what I found really interesting - this was in Salt Lake City in Utah - the majority of our clients in that business that my father started were also family businesses. And so, it wasn't just working with my father and recognizing how that works. It was seeing all of these other family businesses that were going through things similar to our business."
Today, Allen's research and teaching focus on family entrepreneurship, intergenerational transfer, and one of the most delicate topics: how to prepare a generation that hasn't built the business from the start for managing it and even preserving it in the long term.
When the fear of failure leads to missed opportunities
There’s an old saying about the third generation destroying wealth. Is that actually supported by evidence or is it just a myth?
"So, there is some truth to that saying. And it turns out that that saying exists in multiple languages, multiple cultures across the world. But here's the actual truth. Businesses in general don't survive long periods of time. And it turns out that family businesses on average have a survival rate that is longer than non-family businesses."
"That there was some data… where they call it the 30-13-3 rule. So, the assumption is that 30% of businesses survive to the second generation, 13% survive to the third, and 3% survive beyond that. And we're actually collecting data right now at Northwestern University that does not support that. Meaning, there's a lot more businesses in the third, fourth, and fifth generation, across the US in particular… than what that 30-13-3 rule would indicate."
One reason for the gap between research and reality lies in how the academic world defines a "family business," a definition that, according to Allen, is fraught with difficulties.
How do you actually decide what is considered a family business for the purpose of research?
When we talk about survivability, we don't spend a lot of time explaining what that means. If I start a business and I merge that business, then that [first] business, at least according to the data, would be considered a failure. If I sell that business and start a new business with the capital, it also would be considered a failure, at least based on that data."
This rigid definition creates a paradox, particularly in the tech and entrepreneurial sectors. Under this framework, many Israeli companies that achieve a successful exit would technically be considered "failures" in academic research terms, despite representing tremendous economic success.
Allen offers an example that illustrates this distortion: "I had a student come into my office a few years ago and he said, 'I know you study family business. I wish that our family had had a family business. That would be exciting to me.' And I said, ' Tell me what you mean.' And he said, 'Well, my grandfather started a business and it was successful and he sold it before my father could take over. Then my father started a business and it was successful and he sold it before I could take over. And now I'm starting a business. And so, we never became a family business.'"
"And I said, 'Wait a minute. Did the capital from your grandfather's business contribute to your father's business? And he said, 'Yes, it did.' 'And did the capital from your father's business contribute to yours? ' And he said, 'Yes, it did. ' So, we had a long discussion about… is he a third-generation entrepreneur, which I would argue, or is that the example of three failed attempts to have a family business, which is what some people would take it to be?"
"[The terminology] matters because from a research perspective, if you're going to research family businesses, you have to have a definition. At Kellogg we use the term 'Family Enterprise' because I'm trying to make a broader definition."
In your research, you claim that sometimes the next generation in family businesses have a fear of failure. Can fear itself actually make a family business more likely to fail?
"Yes and it goes back to psychology. In psychology, there's [the term] 'Loss Aversion,' and the idea is that we are more focused on the potential for loss than we are on the potential for gain… What tends to happen is, because we're more focused on the potential loss, we tend to build defensive structures around avoiding loss. And the outcome of doing that is that we're not as focused on building structures or strategies around potential gains. And this is especially relevant for family businesses because the potential for loss is much bigger. My business could do poorly. That could impact my children. It could impact my cousins. It could impact my parents' legacy. What happens generally is that I start to get really defensive in the way that I do everything. And in getting super defensive, I start to miss… strategic or offensive opportunities. And so, my fear of what the implications are for failure might actually cause that very failure."
Despite the underlying psychological similarities, family businesses are managed and perceived differently around the world, with local culture playing a profound role in shaping them.
Are there significant differences between family businesses in the US and those in Europe?
"As the world becomes more global and we're more transparent, we're seeing diminishing differences. But I do see a little bit of a difference between the US kind of individualistic entrepreneurial culture and the implications for family businesses compared to Europe… you see many older family businesses in Europe… I see more of an emphasis on overall legacy as defining performance in Europe… in the US, the primary focus is on financial return whereas Europe leans more towards… multiple measures of outcomes, which might include financial return, it might include impact on the community, it might include preservation of the family legacy, it might include longevity of the business."
When handing the business to the next generation poses a risk
Beyond the cultural gaps, one of the most complex and sensitive stages in any family business is the moment when the reins are given over to new hands.
Is succession the most dangerous moment in the life of a family business?
"I'm going to answer that question in a funny way. I'm going to say 'No.' And the reason that I'm going to say 'No' is that succession should not and is not a moment in time. People often look at succession as the moment when the son takes over from his father and his father steps aside. First of all, in family businesses, oftentimes that moment doesn't happen in a moment. Sometimes mom will stay and daughter will come in and you'll have two or three years where they're working together. But it's not a concise moment."
"The other issue," Allen adds, "Is there are two successions in a family business. There is succession of ownership and there is succession of leadership. And very often those two successions don't happen at the same time either. A lot of times the owner will retain ownership until they die, but they'll pass on leadership before they die. And so, you can have a time period where the primary owner or the person who votes the shares is not the person running the business. And so, I would say transitions are probably the points of biggest risk, but… it becomes dangerous in the case where they don't work on it before."
When does the succession process pose a real risk?
"It becomes dangerous because they haven't worked on it. Imagine a family business where the owner doesn't want anybody involved because they want to retain control and power. And they do that throughout their entire life and then unexpectedly they pass. Now they've left the next generation completely unprepared. No involvement in the business, no involvement in the decision making, no involvement in the share ownership, no understanding. So, yes, at that point, that's a succession caused by death, very dangerous. But the same person could have spent 20 years preparing the next generation, bringing them into the business, teaching them about assets and deal flow and customers. And then you still have the exact same thing, an unexpected passing. But the family is much more prepared for that event, even though it was as unexpected."
However, even with the best intentions and careful preparation, families can encounter a fundamental human problem: the child expected to take the reins may simply not be suited to the role.
How do you tell a founder that his or her child isn't capable of taking over?
"That's a great question. And the reality is, you don't. Because the owner makes all decisions. So, yes, I mean you can tell them. But in the end, if I'm the owner of the business and I want to pass it on to a certain person, nobody can tell me, even if I have a board of advisors, even if I have other structures in place, I am, as the owner, going to do exactly what I want."
So how do you prevent a situation like that in advance?
"The answer is to establish what we call good governance in advance of that succession decision. And governance is just the rules and structure that the family agrees to adhere to in making decisions about the business or the family or ownership.
"A couple of ways that it could happen. One would be before the decision is made. Oftentimes in governance, you will put some rules in place that say, we want the most qualified candidate… Let's say in this case, we really feel like family should lead the business… But given that we're going to hire family, we would like the most qualified candidate in place. In order to accomplish that, we agree as a family that we're going to bring an outside entity in to evaluate potential candidates and give feedback on their capabilities… Let's say we combine a selection process that involves an outside entity with requiring that the next generation has some outside work experience and a certain level of education before they come into the business. When you put all of those together, you're reducing the probability of that less desirable person taking over that role."
Families can be a complicated affair: quarreling siblings, divided opinions, leftovers from the past. How do you manage a business amidst all this?
"You want a clear structure of what is the role of owners, what is the role of managers, what is the role of family. That's your foundation… If I'm making decisions about which customer to treat in which way or which vendor I want to use, or do we want to grow a certain office or not, that's a management decision. So, that decision, according to good governance should take place within management, meaning the CEO and the management team should be making that decision… But if it's a decision, for example, about selling the business or maybe a big acquisition, something that's going to change the nature of the business… management could make some suggestions, but that's probably an ownership decision."
When deep disagreements arise, the question sometimes becomes whether the goal of "Keeping the business in the family" ceases to be a blessing and instead becomes a burden.
When should a family accept that preserving the business within the family is actually the wrong objective and that an outside CEO or even selling the company might be better?
"These are two different questions… Some families say, 'We want family to run the business all the time. That's our choice.' There are other families that philosophically will say, 'We want the best person to run the business every time.'
"Let's say that we're a family that decided we want family to run the business no matter what. When would you break that philosophy? You would break that philosophy when either nobody's interested or nobody is prepared."
Throughout the conversation, Allen is careful not to offer "homegrown recipes" - uniform magical solutions - a thing that should not be taken for granted in business consulting.
Many of your answers are open-ended. You analyze options instead of taking a decisive position. Is this a deliberate approach?
"Yep, and a lot of experts - or we might say consultants, right? - they make money by telling families what to do.
"Every family is unique… I think you've caught on something that I believe in very strongly, which is if you're working with or you want to give advice to a family business, your first question should be, 'Tell me what you care about. Tell me how you got here. Tell me what you're trying to accomplish.' And then I can help them to understand how to accomplish that instead of just, 'Do this.'"
The misconceptions about family businesses
After studying families that have succeeded and failed across generations, what is the biggest misconception people have about family businesses?
"I think that the biggest misconception that people have about family businesses is that somehow family businesses are less professional than non-family businesses. There's this assumption, and in English we use the phrase 'Mom and Pop shop'… meant to imply a not professionally run organization. There are thousands upon thousands of family businesses out there that are very professionally run, but still integrate the legacy, the values, the purpose of the family."
"The driver of success, to me, that is most prevalent for these successful family businesses is the ability to align the purpose. So, family businesses that struggle are ones where management is not aligned with ownership, which is not aligned with family. And then you've got family fighting against ownership, which is fighting against management. That's a recipe for disaster in any organization. The ones that tend to be most successful are the ones where the family is mostly aligned with ownership, which is mostly aligned with management. You're never going to be fully aligned. But you've got to at least say, 'We have a path and we're moving towards that path together. And we have a common understanding of what it is we're trying to accomplish.'"
In conclusion, if you could give the founder of a successful family business just one piece of advice, what would it be?
"You want to involve the family in your decisions… involving them as early as possible and appropriately as possible is your key to success. Keeping them out until you feel ready to bring them in is a recipe for disaster. Because what tends to happen with founders is they want to make all the decisions right up until they step away from the business. And what happens is - and I talked about this before - the next generation isn't ready. But there's more to it than that. The next generation is not emotionally attached to the business if you don't allow them to become part of 'This is my dream, this is my goal.' They need to become part of it. If you don't do that, then when the time comes for them to take over, they're going to say, 'Yeah, that's Dad's business,' or 'That's Mom's business,' or 'I don't see what the big deal is.' There's not that emotional attachment. So, it needs to be an inclusive effort."
Published by Globes, Israel business news - en.globes.co.il - on August 24, 2026.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2026.