Buffett on Family Business: Beat the Third Generation Curse

warren buffettWarren Buffett is very good at spotting great family businesses. What does he look for? How can his filters help family businesses prosper?

For one, they can mitigate one of the greatest dangers: the third generation “curse.” This refers to how few family businesses survive beyond the third generation, let alone prosper.

An under-appreciated fact about Berkshire Hathaway, the conglomerate Buffett built: virtually all its family businesses boast second or third generation descendants who rival or outshine previous generations. That is rare among family businesses.

So while every family and business situation differs, Berkshire’s two dozen family companies are a good place to look for insight about multi-generational prosperity in the family business.

Studying Berkshire’s family businesses, I found that they are united by the following values. These values are important factors in their success, in the founding generation and subsequent ones.

Family business members, and their professional advisors, whether in law, accounting, or other fields, would do well to ponder these points.

Thrift: avoid spendthrift behavior, the ruin of many a small business, and appreciate that by saving a penny, you can earn a nickel. John Justin Jr. ‘s thrift helped thethird generation Texas businessman forge the cowboy boot brand into the American consumer’s consciousness and a billion dollar franchise.

Earnestness: there is value in keeping your promises. The Pritzker brothers,grandsons of the patriarch, lived this value in building a multi-billion dollar industrial conglomerate, Chicago-based Marmon Group.

Reputation: family business with reputations for integrity are worth more than rivals.Father and son Jim and Kevin Clayton have been proving this for two generations while building their billion dollar manufactured housing business from a Tennessee start-up to number one in the industry.

Self-starters: cultivate that drive to succeed, to experiment, to surpass, epitomized by the hundreds of multi-generational family businesses that define the Dairy Queen family of restaurants, headquartered in Minneapolis-St. Paul.

Autonomy: entrust your team, encourage them, give them responsibility, and have their backs. Drayton McLane, grandson who turned a million dollar grocery wholesaler into a multi-billion dollar supply chain maven, gave division managers total responsibility for their regions. Granting such autonomy was sensible to help each division cater to local customer tastes nationwide, and lucrative because those managers felt a direct personal stake in the Texas-based business.

Kinship: Above all, value the family identity and legacy. Believe in the permanence of the business by adopting a long-term view: 50 to 100 years. Seattle’s Ben BridgeJewelers highlights this, now a 5th generation family business.

There is much more to succeeding in the family business, of course, but these values are powerful and useful as a starting point. For more, check out details on some of Berkshire’s family businesses in this chart I made for a post on a prominent investor blog; for a deep dive, read the fascinating stories of these and other Berkshire businesses in my new book, whose web site is here.

Cunningham, a professor at George Washington University, is the author of the new book, Berkshire Beyond Buffett: The Enduring Value of Values, and editor of the classic book, The Essays of Warren Buffett: Lessons for Corporate America (first published in 1997 and updated regularly).

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