A family business is any enterprise in which a majority of the ownership or control lies within a family and in which two or more family members are directly involved. It is a vital force in the American economy. About 90% of all U.S. businesses are family owned or controlled. They range in size from the traditional small business to a third of the Fortune 500 companies. It is estimated that family businesses generate about half of the country’s Gross National Product and half of the total wages paid. This economic engine pulls the free enterprise system for our nation, and the American economy depends heavily on the success and existence of the family business. 

It seems extremely alarming that such a vital force has such a poor survival rate. Less than one third of family businesses survive the transition from first to second generation ownership. At any given time, 40% of U.S. businesses are facing the transfer of ownership issue, and the options are few. The business founders can either close the doors, sell to an outsider or employee, retain ownership but hire outside management, or retain family ownership and management control. To be one of the few family businesses that survive transfer of ownership requires a good understanding of your business and your family. There are four basic reasons why family firms fail to transfer the business from generation to generation successfully:

The primary cause of failure is lack of planning. Like the family system, roles in the business such as president, manager, employee, stockholder/owner carry specific responsibilities and expectations. And, like the home environment, businesses have their own communication, conflict resolution, and decision-making styles. Conflicts can arise when roles assumed in one system intrude on roles in the other, when communication patterns used in one system don’t work in the other, or when there are conflicts of interest between the two systems. 

The boss and employee roles a husband and wife might assume at work most likely will not be appropriate as at-home roles. Likewise, a role assumed in the family may not work well in the business. As an example, offspring who are peacemakers at home may find themselves mediating management conflicts between family members whether or not they have the desire or qualifications to do so. A special case of role carry over may occur when an individual is continually cast in a particular role. This happens primarily to children. Everyone grows up with a label…the good one; the black sheep; the smart one; Dad’s favorite. While a person may outgrow a label or perception, the family often views that person carrying that attribute. This perception may affect the way that person operates in the business. 

It is important to understand that the family’s strong emotional attachments and overriding sense of loyalty to each other create unique management situations. System overlap is apparent when conflicts of interest arise between the family and the business. Some families put personal concerns ahead of business issues instead of trying to achieve a balance between the two. For example, solving a family problem, such as giving an incompetent relative a position in the firm, ignores the company’s personnel needs but meets the needs of family loyalty. Another example of conflict of interest may be a business owner’s feeling that giving children equal salaries is fair. Siblings who have more responsibility but receive the same pay as those with less responsibility usually resent it. 

Much of this behavior can be eliminated or manager by devising policies that meet the needs of both the family and the business. Developing these policies is part of the family business strategic planning process, reflected in a Family Business Charters. In creating a charter, family business members go through a process of scenario planning where they brainstorm about things that could happen to them and the business and then develop guidelines for dealing with these “what-ifs.” This serves two purposes. First, deciding how to handle situations in the hypothetical is easier then confronting an actual crisis, and, second, it lessens the likelihood that family members will be shocked by each other’s reactions. The process of creating a charter deliberately requires intense work on the part of business/family members, which itself creates a sense of teamwork with stronger buy-in. Family members often assume they know each other and can rely on predicted responses, but good business sense is to avoid the unexpected and provide a road map through complicated times and into the future. The family business that plans together stays together.