Three Examples of Third-Generation Family Business Failure

The first generation starts a business, the second generation runs it, and the third generation ruins it.

Photo by Christopher Sardegna on Unsplash

Andrew Carnegie is credited with the most infamous and requoted aphorism in family business. “Three generations from shirtsleeves to shirtsleeves” refers to the commonly held belief that in the lifecycle of family business empires, the third generation is where it all goes wrong.

He was not alone in his assessment. Across cultures, geographies and industries, the third-generation failure myth is ubiquitous. The Chinese have 富不过三代, which translates as: “Wealth does not survive three generations.”

Statistics point to the theory’s validity but only tangentially. According to the Conway Centre for Family Business, only 12 per cent of all family businesses are viable into the third generation, which means that 88 per cent of family businesses do not make it past the second. That said, of businesses that pass to the third generation, only 3 per cent make it to the fourth generation.

This is not to suggest that all family businesses are doomed once the founder’s grandchildren step in. Ford, Walmart and IKEA are all examples of family businesses that refute the theory.

However, poignant examples of third-generation failure affirming the theory also exist. Here are three such cases:

Three Examples of Third-Generation Family Business Failure
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Steinberg

In the 1950s and 60s, Steinberg was a thriving grocery chain in Eastern Canada. It began in 1917 in Montreal as a corner store or “couche-tarde” owned by Hungarian immigrant Ida Steinberg. The business grew exponentially when Sam, Ida’s son, took over.

Sam Steinberg is largely credited with pioneering the concept of a supermarket in Eastern Canada when he opened an all-encompassing grocery store in 1934. Under his leadership, Steinberg became the largest grocery chain in Quebec and had expanded into Ontario and Atlantic Canada.

In hindsight, his biggest failing was doing nothing to prepare the next generation of family leadership. Following his death in 1978, his daughters Mitzi, Marilyn and Evelyn fought over control of the company. In the absence of strong leadership, it began to decline. Rising labour costs and increased competition were serious threats that went largely ignored.

In the 1980s, external help was brought in, but by that point, it was too late. Steinberg was forced into a leveraged buyout for US$1.5 billion in 1992.

Three Examples of Third-Generation Family Business Failure
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Gucci 

Guccio Gucci founded the Gucci Empire in the early 1900s. Now known for fashionable handbags, the Italian company got its start in luggage.

When Guccio died in 1953, the business was left to his eldest son, Aldo, who internationalised it. Under his leadership, Gucci became a premier brand in fashion.

Problems became apparent soon after the third generation took control. The unilateral vision that had defined the first two generations of leadership, dissolved. Aldo’s son, Paolo, and his nephew Maurizio, who ostensibly shared control, had vastly different aspirations. Paolo launched a disastrous fashion line that haemorrhaged money – a pursuit which eventually forced him into exile.

Under Maurizio’s sole stewardship, the once prosperous fashion giant declined precipitously. By 1991, it had a negative net worth of US$17.3 million. With more than US$40 million in personal debt besides, Maurizio was finally forced out by Investcorp.

Three Examples of Third-Generation Family Business Failure
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Seagram

At one point, Seagram, the crown jewel in the Bronfman family empire, was the largest owner of alcoholic beverage lines in the world.

The first-generation entrepreneur Samuel Bronfman took advantage of the post-prohibition alcohol boom to make Seagram a household name in North America. Their three most popular products were Seven Crown, VO and Crown Royal. The company was so successful that it expanded into other industries. Seagram bought the Texas Pacific Coal and Oil Company for about US$276 million in 1963. The company continued to thrive under second-generation Edgar Bronfman’s control, which lasted for a little over two decades.

Trouble began when Edgar’s son, Edgar Bronfman Jr, took over in 1994. Keen to enter the film and entertainment industry, Edgar Bronfman Jr sold Seagram’s 24.3 per cent ownership stake in DuPont Industries to free up investment capital. That stake, however, accounted for 70 per cent of Seagram’s income.

Bronfman Jr took the proceeds and bought a controlling interest in MCA (Universal Pictures) and later acquired PolyGram and Deutsche Grammophon. These interests, as much as they aligned with Edgar Jr’s dream of becoming an entertainment mogul, did little to better the family empire. Within five years, the family‘s controlling interest in Seagram was sold to Vivendi.