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February 08, 2008


John East

I heard on the radio a couple of weeks ago (sorry, no link) that the failure rate of second generation family businesses is something like 60%, rising to 80%+ in the third generation.
Whether this significantly excedes failure rates of business sold off as going concerns I haven't a clue, but the figures suggest that if one hasn't demonstrated entrepreneurial flare by starting up a business from scratch, on inheriting a going concern the wisest course of action might be to sell up and go and lie on a beach somewhere.


John East,
it seems inheritable entrepeneurial spirit and inheritable wisdom don't necessarily go together.
(i.e. You may be right, but don't expect wisdom to be greater amongst hiers as it is anywhere else in the population.)


What is the failure rate of first generation family businesses? Over 50%, if memory serves.


The claims aren't mutually exclusive, anyway.

There's no reason to think that inheriting a family business is anything like an optimal allocation of capital; in fact you'd struggle to find a process less likely to allocate capital to people with the skills (and interest) to manage it successfully.

The reason for this is of course that capital is only partially fungible (import Dsquared, RobertVienneau*); if you inherit a business, as opposed to *money*, the capital is already pre-allocated to some particular task. And there is no reason whatsoever to think that your picking the right parents implies you'll be any use running Alderman Progress & Sons VirtuaWare Ltd, or that you have any desire to.

And anyway, if you've inherited a business, what you need is not entrepreneurship. Wrong problem.


Most businesses fail - see Why Most Tings Fail by Paul Ormerod http://www.paulormerod.com/.

This is Creative Destruction, is intrinsic to modern economies, and is a good thing (on average and in the long term).

It is what make the economy a cognitive process more powerful than any individual understanding. In this respect (and in others) entrepreneurship is formally equivalent to biological natural selection.


Fisher's 2x2 matrix p-value is 0.09165.

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