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What is the three-generation rule for businesses?

On Behalf of | Nov 7, 2022 | Business law |

If you’re a business owner, you may have heard of the three-generation rule. It is certainly not an official rule, but more of an observation about how things tend to play out.

The rule states that most family businesses will fail by the third generation. This means that you are the first generation as you start your company, your own children are the second generation when they take over, and your grandchildren are the third generation – who are likely not to inherit the business at all or to take it over and then watch it fail.

Why is this important to know?

This may just sound like something of a depressing statistic. Most family business owners have big plans for the company and they imagine it outliving them by a large margin. Finding out that the majority of businesses are not going to last very long at all sounds discouraging.

But it doesn’t have to be. The big thing to take away from this is an understanding of how difficult it is to pass a business on and get it to succeed. That means that this isn’t something you need to do lightly. You want to start early, train your heirs, consider all of your business succession options and really put them in the best possible position to succeed.

This doesn’t guarantee that they will, of course, but nothing can. You just need to be aware of the risks that your heirs are facing so that you can try to mitigate those risks and help them have success. As you work your way through this process, take the time to carefully think about all of the legal options you can utilize to accomplish your goals.