The U.S. Bureau of the Census reports that family-owned and family-controlled companies represent roughly 90% of all U.S. business enterprises. Collectively, these businesses generate 50% of the U.S. Gross National Product and employ nearly two out of every three Americans. In short, family-owned businesses are the backbone of the U.S. economy.

Despite their importance to the general welfare of the country, research shows that two out of three family enterprises will fail to successfully transition from first to second generation ownership. Of those that do succeed, the odds of surviving the second to third generation transition are but 50-50. Why?

A good number of failures result from a lack of leadership. Too frequently, the founder or majority owner steps aside and finds that he/she has failed to develop the necessary bench strength or wrongly assumed another family member would rise to the occasion. Consider Wang Laboratories, the company that pioneered electronic calculators, minicomputers and office automation. Under founder An Wang’s leadership, company revenues grew to more than $3 billion and shareholders had a field day. Then, in 1986, An Wang installed his 36-year-old son, Fred Wang, as president of the company. Fred struggled to lead the company and, for many reasons, it floundered. In 1989, An Wang removed his son and hired professional management but it was too late. The company filed for bankruptcy protection in 1992.

In contrast, Forrest Mars Senior, largely credited with transforming M&M Mars into a global consumer juggernaut, handed the company keys to his sons Forrest Junior and John. Having been determined “not to raise playboys,” he first forced his two sons to learn about business the old-fashioned way, by succeeding and failing on their own, which they did. Then, in 1973, Forrest Senior retired and walked away, having reportedly said to John and Forrest Junior: “Here’s the end of the pool and I gotta kick you in it. Goodbye. I taught you how to swim.” Today, the company has revenues of more than $30 billion and stands as one of the largest and most successful privately held companies in the world. It is managed by a non-family member.

Family businesses seeking to survive a generational transition need to develop a succession plan that includes:

  1. A discussion of the company’s strategy to either grow, harvest or divest of its market position;
  2. The critical success factors for strategy implementation;
  3. An objective assessment the company’s resources and value;
  4. A personnel plan that (i) highlights the skills needed for all key roles, and (ii) identifies the post-transition roles of the various family members; and
  5. A timeline with milestones to smooth the generational handoff.

Development of a succession plans should involve all family stakeholders as well as the company’s legal counsel, accountants, insurance professionals and business consultants. Good process requires objectivity and external resources afford needed perspective – business owners might be well served to think of third-party fees as investments in the future of their companies’ business, and not as expenses.

For families planning to sell their business, an objective assessment of value will prove pivotal. Here, too, third parties can help keep opinions and emotions at bay while examining the company’s financial health, market position, business opportunity as well as competitive threats and risk. And since a company is ultimately worth only what someone will pay to buy it, the family should identify in advance what it will accept and when it will walk-away.

Most importantly, family-owned businesses should plan for downstream events such as owner/founder retirement or, worse, disability or death. The planning and decision-making process should rely on skills, knowledge of the business and judgment, not lineage, birth date or the family pecking order. Family-owned businesses should plan for the future in the cold light of day.