THE first generation makes the money, the second enjoys it and the third squanders it all.

Believe it or not, that adage is actually backed by academic research.

Dr Sanjay Goel, an associate professor at Minnesota University's school of business, said that typically a family business starts to lose its entrepreneurial edge by the third generation.

But if the founder passes on good family values to his successors, the empire may retain its essence and grow over succeeding generations, said Dr Goel, who was in Singapore recently at the invitation of the Singapore Management University.

The expert on strategic management and entrepreneurship said his conclusion was based on studies of family-run firms in the US and Europe, and was also the 'consensus of experts in the field'.

Dr Goel said successors of family firms, especially those that have achieved a certain size, often become too pre-occupied with daily operations to the point where they neglect to keep the business relevant through re-invention.

And ensuring relevance to customers is especially vital for family-run firms because they are typically in more traditional fields of businesses.

'The idea is to sustain the entrepreneurial drive across generations, because the world is changing even faster now,' added Dr Goel.

He cautioned that unless successors of family- run firms possess the same values and drive as their founders, the operation is likely to end up 'stuck in time' due to entrepreneurial malaise.

Dr Goel's advice for first-generation entrepreneurs who want their businesses to succeed over the ages is: 'Spend as much time with your family as with your business.'

'The kids will learn from watching the entrepreneurs go through pressure, see the sacrifices they have to make and appreciate the business more.'

Mr Adrin Loi, executive chairman of Ya Kun International, a family firm that owns a popular kaya toast and coffee chain, agrees with Dr Goel.

'The descendants of these entrepreneurs...will witness the founders' hard work and determination to succeed in the business, and have a strong familial obligation to continue and perpetuate its growth,' said Mr Loi, whose father, Loi Ah Koon, founded Ya Kun in the 1920s.

'I can vouch that they will also fuse tradition with modernity...without compromising the true essence of the business', said Mr Loi, who has successfully taken Ya Kun's business to Indonesia, Korea, Japan, Taiwan, Vietnam and the Philippines.

Dr Goel also said that in such cases, the successor would have a greater awareness of his own family's values and align them with his business aims.

And when the time comes, they will be able to better leverage on the strengths of the family to re-invent and expand the business, while still retaining its individual quality and heritage.

This article was first published in The Straits Times on August 20, 2008.