Notes · The pattern

Why nine family fortunes in ten do not survive the third generation

Every culture has a proverb for the same observation: America says “shirtsleeves to shirtsleeves in three generations”, China says “wealth does not pass three generations”. The most cited study reports 70% of transfers failing by the next generation, 90% by the third. Here is what those figures say, what they are criticised for, and what they truly teach.

Quentin Devillechabrolle · Partner & CTO Published 5 min read

A proverb every culture invented

The American saying “shirtsleeves to shirtsleeves in three generations” describes the trajectory: the first generation builds, the second manages, the third disperses. Lancashire says “clogs to clogs”; China, “fù bù guò sān dài”, wealth does not pass three generations. The observation is so widespread that it predates any statistic. The question is what the numbers say.

What the most cited study says

In 2003, Roy Williams and Vic Preisser published Preparing Heirs, based on the examination of 3,250 wealthy families that had transferred their wealth. Their finding: about 70% of transfers fail by the following generation, in the sense of a loss of control of the assets and of family unity, and the erosion reaches nine families in ten by the third generation.

The most instructive part is not the failure rate but its breakdown. 60% of failures stem from trust and communication within the family; 25% from insufficiently prepared heirs; the remainder splits between the absence of a shared family mission and, for under 5%, technical errors: tax, legal, allocation. In other words, almost everything that destroys transferred wealth is internal to the family, and almost none of it comes from markets or advisers.

What the figures are criticised for

The statistic deserves to be handled with the rigour it preaches. The Williams and Preisser survey is declarative, conducted by practitioners, never published in a peer-reviewed journal, and its definition of “failure” is broad. As for the neighbouring version of the myth, “70% of family businesses disappear by the second generation”, it rests on a single 1980s survey of Illinois manufacturers; the Harvard Business Review showed in 2021 that it proved no such thing, family businesses living longer on average than others.

Should the figures be discarded, then? No: they should be read for what they are, an order of magnitude drawn from the field rather than a law of nature. And one should note what even their critics do not dispute.

The lesson that survives scrutiny

None of the critiques rehabilitates markets as the cause of erosion. The whole debate concerns internal factors: trust, preparation, governance. On that point the study, its detractors and experience converge.

Our reading, after nearly thirty years of family wealth: what is lost between generations is not first money, it is entropy settling in. Information scatters: who holds what, where, in what form. Discipline dilutes: why decisions were made that way. Memory fades: what had been learned, and from which mistakes. The assets only disappear afterwards.

The practical consequence: preparing heirs is necessary; bequeathing them a system that holds the information, the discipline and the memory is what changes the slope.

At Verdoso

It is precisely against that entropy that Verdoso built Cassandra, the operating system of its own wealth: the entirety of the assets consolidated continuously, decisions recorded with their reasons, forecasts confronted with reality over time. What the next generation then receives is no longer a vault and some stories: it is the family's working memory. Discover Cassandra.

What exactly does the Williams & Preisser study say?
Across 3,250 wealthy families studied (Preparing Heirs, 2003): about 70% of wealth transfers fail by the next generation, 90% by the third. Measured causes: 60% breakdowns of trust and communication, 25% insufficiently prepared heirs, under 5% technical errors.
Where does the saying “shirtsleeves to shirtsleeves in three generations” come from?
It is an American proverb: the first generation builds in shirtsleeves, the third returns to them. Every culture has its variant: “clogs to clogs” in Lancashire, “wealth does not pass three generations” in China.
Are these statistics reliable?
They come from a practitioner survey, never published in a peer-reviewed journal, and the family-business variant of the myth was debunked by the Harvard Business Review in 2021. The order of magnitude remains a useful warning, and the finding of internal causes is consensual.
How does family wealth survive three generations?
By transmitting more than assets: information consolidated rather than scattered, an explicit rather than tacit decision discipline, and the dated memory of past reasoning. Prepare the heirs, and bequeath them the system that carries all three.
Sources
  1. Roy Williams and Vic Preisser, Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values, Robert D. Reed Publishers, 2003.
  2. Josh Baron and Rob Lachenauer, “Do Most Family Businesses Really Fail by the Third Generation?”, Harvard Business Review, July 2021.
  3. John L. Ward, Keeping the Family Business Healthy, Jossey-Bass, 1987.

These notes describe methods. They are neither investment advice nor an offer of services.