Many readers of Worth are among those who have elevated this aptitude to an art form. Add to prescience an inspired idea for a new product, a flair for organization, and an ability to motivate employees, and, with luck and hard work, a healthy and dynamic family business results. While this alchemy is rare, it can have a dramatic impact on the world: Family businesses produce over half the U.S. gross domestic product, and provide 60 percent of all the nation’s jobs.

Yet, though proven farsighted in business, astonishingly few of the nation’s successful entrepreneurs apply their forecasting skills to the crucial question of succession. According to a survey of 1,143 family businesses (mostly formed after World War II) conducted last year by MassMutual Financial and the Raymond Family Business Institute, nearly two in five of these companies will see their founders retire in the next four years. A startling 42 percent of those enterprises have not named a successor.

Loaded Dice
Successful entrepreneurs are, by their nature, risk takers, but this failure to plan represents a blind gamble with their life’s work—and one with no upside potential. Change in control upon the death or retirement of a founder can, literally, imperil an otherwise healthy business. Indeed, according to family business consultants, few survive it. These pundits estimate that between two-thirds and three-quarters of all family enterprises fail sometime between the first and third generations.

A variety of factors can ostensibly explain this statistic, but most failures have, at their root, fractious family relationships. Siblings who do not get along make poor business partners when the company ownership falls to them. Even in congenial families, there will be legitimate differences of opinion over business strategy. Those employed by the family company may object to any change of control, while those who are not may want to see the business sold.

Between these two extremes, any one of an array of different opinions about company policies and business strategy may lead to paralysis. To avoid losing all momentum, a family business must establish a succession plan with either a clear leadership mandate or a mechanism for choosing a leader quickly upon the exit of the founder.

Ounce of Prevention
There are few things less appealing than an open can of worms, and so families are often loath to sort out these issues after the founder exits the stage. It is usually better for the founder, in consultation with the family, to delineate guiding principles for the firm and its leadership succession when he or she is still in charge. While there is growing recognition of the value of articulating these principles formally in what are often called “family creeds,” only 37 percent of those polled by MassMutual have drafted this type of document.

Those who have followed this process may find that the principles in the creeds parallel their family mission statements. Indeed, these creeds should be consonant with the family goals and values. This is particularly important, since the decisions made regarding the disposition of a family business will have profound effects on family, philanthropic and institutional relationships.

Given that the wealth that supports our philanthropic pursuits often derives from the family businesses, we must remain mindful of the impact a change in control may have on our charitable endeavors. Also, family business exigencies often drive our relationships with banks, accounting firms and law firms. We must examine how proposed alterations to the business will affect those associations. For example, if we have relied on the family business accountants and lawyers for advice, will we need to find others after selling the firm? How will changes to our family business affect our own legal and accounting needs?

Family creeds can also set the tone for the corporate culture after its chief proponent, the founder, is gone. Since corporate culture is often the key to a company’s success, spurring as it does the staff’s efforts and entrepreneurship, this continuity can benefit all of the firm’s stakeholders. 

Illustration by Lisa Franke