Why Are Some Family Businesses Built to Last?

When you think of a family business, your mind likely goes to one of two places. You might think of your local corner store that’s been there forever, with the family that’s always around, quietly and consistently serving your community. 

Or you might think of the embattled Roy family of TV’s Succession, each member scheming over their perceived dynastic right to run a multibillion-dollar global conglomerate. (If you’re in a real-world, Cancon frame of mind, you might call to mind the dramatic power plays that rattled the Rogers empire in 2021.) 

But family businesses comprise so much more than these extremes. They come in all sizes, thrive in virtually every industry and demonstrate all degrees of ambition — from the steady and staid to the global conquerors like Walmart. Their founding family members can be fastidiously involved in every aspect of day-to-day operations, utterly removed from the fray, or somewhere in between. If there is a common thread, it’s this: Every family business is deeply affected by how the family behind it functions.

This is where things get really interesting for Sarah Burrows, assistant professor of entrepreneurship at Smith School of Business. Burrows researches the direction and dynamics of family businesses, drawing on a background in psychology to better understand how what happens in the living room affects what happens in the boardroom. 

Burrows recently sat down with Smith Business Insight contributor Deborah Aarts to talk about the complicated, compelling and consequential inner worlds of family businesses. 

What interests you most about family businesses? 

The underlying theme of my research ties what goes on in the family, and the dynamics among family members, to the next generation: How willing they are to be an entrepreneur, how they approach the family business, and how all that influences the strategic management of the firm. Essentially, I’m very interested in understanding how what goes on in the family influences the entrepreneurial and business side of things. 

Your dissertation got into the career paths the younger generations of entrepreneurial families choose for themselves. What is something surprising you learned in this research? 

There has been a lot of research to prove that, if you are a kid that comes from an entrepreneurial family, you’re significantly more likely to become an entrepreneur yourself. One of my favourite studies is by Lindquist and colleagues, from 2015. They had access to Swedish adoption data, including information about the careers of adopted kids, of their biological parents and of their adoptive parents. They found that one-third of intergenerational transmission of entrepreneurship was attributable to biology — in other words, nature. But two-thirds, twice as much, was attributable to upbringing and the work of adoptive parents — in other words, nurture. 

Coming across that study really sparked my interest. I wanted to understand: What’s going on in these families that makes their kids so likely to follow their parents’ paths? So, my dissertation involved interviewing the parents and children of enterprising families — those with many generations of entrepreneurs — to better understand how that’s nurtured and why one kid might choose it when another rejects it. 

It can vary a great deal. For example, often, the first-born child would reject entrepreneurship because they were the ones who saw kind of the grittiest and most brutal phases of the entrepreneurship process — they might have seen Mom and Dad hustling, not having a life, and not being there, in service of building the business. Whereas their younger siblings who came later were more likely to reap the benefits and were therefore more willing to follow in their parents’ footsteps. They had a very different experience, even in the same home. So, yes, there is an aspect of genetics at play, but we do find that the nurture component — how you grew up and what you see — is really kind of a critical driving force.

When people find out what you do, how quickly do they start talking about Succession? 

Pretty quickly! Before, my favourite example to bring up was always The Godfather — which has actually been brought into academic literature about family businesses. But it's all about Succession now. 

Does the popularity and prestige of this show help people better understand your work? 

It’s an extreme example, and of course, it’s not real. But these types of families, running these huge multinational corporations, definitely do exist — and the show sheds light on the really messy family dynamics that can take hold. 

Here’s one thing I really like about Succession: People often have preconceived notions that family-owned businesses are SMEs [small and medium-sized enterprises]. They think about, say, the small local restaurant with awesome food that’s run by a wonderful family. But the term “family business” can also apply to publicly held, multinational corporations. So, family businesses really are everywhere. Succession kind of gives us a nice, if over-the-top, representation of the fact that families control a lot of the world’s wealth. 

The show also, somewhat improbably, got a lot of people thinking and talking about inter-generational transitions of power. Aside from the fact that humans love drama, why do you think the succession plot lines of Succession struck such a chord? 

Succession is one of, if not the, biggest challenge for all family businesses, regardless of size. If you’re a company on the scale of a Rogers or a Walmart, with a board of directors and other stakeholders and components at play, it’s more complicated. But with almost all family businesses, there’s intent and desire to pass things on to the next generation, and how people handle that is incredibly important. 

The number of family-owned businesses that successfully transfer from first to second generation is about 30 per cent. That means that 70 per cent are not making it. And as for businesses that successfully transfer from the second to the third generation? Only 12 per cent get there.

How come? Why is succession so tricky? 

Because mixing family and business is messy. We have to remember that years, often decades, of family history are influencing the outcome as much as what’s happening in the business. The success of the succession, if you’ll pardon the wordplay, is very much influenced by the family dynamics. 

Sometimes, a succession plan fails because the subsequent generations don’t have a desire to take it over. Sometimes, it’s because the predecessor doesn’t want to let go of the reins, because the business is in many ways like a child to them. In other cases, the research suggests it’s because of breakdowns in trust and issues with communication.

I think, also, people often think of succession as one point in time — as a single action that takes place when the baton is passed. But the most successful multi-generational family-owned businesses I speak with see succession as a continuous process. 

What does that look like? 

The family starts having conversations about the transition well before the next gen takes over. They don’t wait until the kid is 22 years old to try to get them interested. They bring the kid to the office at a young age, maybe give them an odd job, to get them involved with the employees and with other important stakeholders. That sort of socialization helps not only form tacit knowledge of the business but also creates a sense of attachment and a kind of emotional connection to the firm. 

In addition, usually, the incoming generation will go out and not only get a relevant education but also work elsewhere in the industry for three to five years. And when they come back, they have to kind of work their way up. Sometimes, you’ll see a non-family employee step in—someone who has been around in a senior leadership position with the family CEO or founder for a long time—to help guide the firm during the transition. These things tend to make the transition smoother.

 Why does it matter so much that family businesses get it right? 

Because family businesses are so prevalent. They’ve been around throughout the entire history of humanity. You can go back centuries and see clans, rich dynasties, even organized crime — all family businesses. Today, it’s estimated that 87 per cent of the businesses in the world are family-owned. They are a part of our communities, they contribute to our GDP and they are what keep the economy going, in many ways. 

So, despite the very messiness that can come from blending families and business, the majority of business owners worldwide are choosing to do so. It is incredibly rewarding to them, and it’s incredibly important to our economy. That’s why we need to understand how they function.