Only 12% of family businesses stay in the family by the third generation. A Goldman Sachs chairman says optimism is the reason

Only about 12% of family-owned businesses make it to a third generation still under family control, according to a new Goldman Sachs playbook aimed at the founders and dynasties the bank counts among its most prized clients. It’s a statistic Goldman itself put in print in “Honoring Legacy and Positioning for the Future,” a paper shaped by senior leaders across its Investment Banking and Private Wealth Management divisions.

To dig into the thinking behind it, Fortune put a series of questions to François-Xavier de Mallmann, chairman of Goldman Sachs’ Investment Banking division and chairman of Goldman Sachs EMEA — the banker steering Goldman’s relationships with many of the world’s largest family-controlled enterprises. His answers, lightly edited for length, get at something the playbook’s five-question framework can’t fully capture on its own: that the biggest threat to a family business isn’t usually a missing legal document. It’s optimism.

Your paper says only 12% of family businesses make it to a third generation. Why is the success rate still so low?

Founder and family-controlled companies are major contributors to the global economy. Decisions around succession and ownership are among the most consequential they will make, and both have a significant impact on the business and the family.  Goldman Sachs has a dedicated effort focused on serving family-owned businesses and founders around the world, working across our Global Banking & Markets and Asset & Wealth Management divisions. 

The statistic is striking—but whether it’s considered “low” or not depends on how you define success. The real questions are whether or not the business is flourishing and whether the decisions made along the way have positioned both the company and family for long-term success.  

In general, family-controlled companies tend to outperform non-family-controlled companies over a long period of time, but maintaining that control across multiple generations becomes increasingly complex with the passage of time. In the first generation, the family and business interests tend to largely overlap. Over time, those interests can diverge as the business grows, the shareholder base expands, and the priorities of individual family members evolve. Recognizing those differing, and potentially competing, interests—and being deliberate about how they are balanced—is important given their significance for the underlying businesses. 

So, if you take a step back, by the third generation it is a lower percentage of the total number of companies that are still family-owned. But that doesn’t necessarily mean the other 88% have failed.  Some companies greatly benefit from remaining in family shareholders’ hands for a long period of time, while others benefit from evolving their ownership structure. There are often needs to consolidate, scale, access new pools of capital or bring in........

© Fortune