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Keeping It in the Family

Few family businesses pass successfully from a founder to the next generation. Here’s how to beat the odds.

Many entrepreneurs hope to pass on a thriving business to their children. But even after founding and building a company, few succeed in turning it into a lasting family enterprise.

Just 16 percent of businesses pass successfully from a founder to the next generation. The statistics plummet for future generations: 5 percent of companies launched by individuals pass successfully to the founder’s grandchildren, 3 percent endure to be run by great-grandchildren, and just 2 percent survive as family businesses until the fourth generation, according to data from Cambridge Family Enterprise Group, a consulting firm in Cambridge, Massachusetts.

Why are these percentages so low? One reason is that a sale of the company can be a good outcome for the family. Others include a loss of family interest, conflicts among relatives, and succession problems, the consulting firm found. And then there are the difficulties that can face any company, including industry changes, missed opportunities, and inadequate resources.

The savviest family executives manage generational transitions by focusing not on succession but on corporate governance, notes Justin Craig, clinical professor of family enterprise and co-director for the Center for Family Enterprise at Northwestern University’s Kellogg School of Business. “Governance is insurance against the many problems of entitlement,” he says. 

Establishing a governance structure makes it easier to balance the various hats that relatives wear at different times. Some companies set up a family council, to make policy for the ownership group. It’s also smart for the board of directors to have at least three outside members who take the lead in appointing and monitoring the CEO. They can also handle any awkward conversations about performance or pay.

They are not there to make friends, so it takes some pressure off the parents, who can say, ‘This is not my decision,’” Craig comments.

A good time to begin succession planning is five years before the founder expects to step down from active management, either to become chairman or to leave the business altogether, says Pascale Michaud, a partner at Cambridge Family Enterprise Group. He adds that another common catalyst is “pressure from the children to clarify what the game plan will be.

The most fraught question is whether a family member or an outsider will lead the company. Some families choose to put a non-relative in charge while waiting for younger relations to gain enough experience to take over. At Hermès, the French luxury-goods maker, caretaker CEO Patrick Thomas stepped down in 2014 in favor of sixth-generation family member Axel Dumas. But, says Michaud, “We see a little bit less nepotism these days.

Promoting a relative often makes the most sense for large families, where there’s a wider talent pool, or in industries like luxury goods or beverages, where a thorough grounding in design or an understanding of a family recipe is helpful, she says. It’s important to have explicit procedures in place to choose the next CEO and to communicate them to younger family members. “You can’t take someone aside at a family dinner and say, ‘I’m thinking about you for the CEO,’” she notes.

Children raised in a business family should start helping out at an early age to increase their awareness, Michaud says. As teenagers or young adults, they can have summer jobs and internships. They should follow the example of their older relatives by working harder than other employees, never seeking special treatment, staying humble, and maintaining confidentiality, she adds.

If they show interest in joining the business after college, the family can encourage them to first seek out useful experiences, such as working elsewhere in the industry or in finance or technology. Some companies require an undergraduate or graduate degree or a certain number of years of work experience before an employee can take on a particular role. The rules should be the same for family members with no favoritism, she says.

In companies that have been under family ownership for generations, there is often an expectation that children who hope to join the leadership team will work their way up from the bottom. Continental Grain Company is run by the founding Fribourg family, which started a grain-trading business in Arlon, Belgium, in 1813. Two hundred years later, the firm, now based in New York City, where the family relocated during the Second World War, is a major food producer.

Chairman and CEO Paul Fribourg, a sixth-generation family member, has been working at the company since he started his career. “You have to go out in the field and work in the business,” Fribourg told an audience at the Spanish business school IESE’s Global Leadership Forum in New York in 2014. He moved around the world as a young man, loading grain onto barges in Memphis, and working at Continental operations in Ohio, Virginia, Illinois, Oklahoma, and Europe. His son, in his early 20s, is now similarly working in the industry. 

This peripatetic life isn’t for everyone, and it weeds out family members who are unsuited to leadership roles, Fribourg told his 2014 audience. “Having to live that lifestyle eliminates 90 percent of family members,” he said. “Only the people who really want to do it should.”

Another lesson his family has learned over the years, Fribourg added, is to use the company as a store of wealth. “One of the keys in family business is keeping the capital in the company, not paying out a lot of cash,” he said. Paying out only modest dividends forces family members to “get up in the morning and do something to support yourself and your lifestyle,” Fribourg continued, and it prevents them from overspending or mis-investing the family’s money. “Our experience is the worst thing you can do for any family is to give the next generation a pile of cash,” he concluded. 

Families also may have to handle relatives who have inherited a share of the business but don’t hold a day job at the company. Problems can arise when these family members come into the office “and start telling everyone what to do,” Michaud says. Even those who do work at the firm have to differentiate between their demeanor at the office, where they may be in charge, and at home, where they may not have the authority over the same family members. 

Younger family members who don’t want to join the business but will still hold ownership stakes can contribute in other ways, Michaud says. They can be involved in the corporate or family foundation, for example, or join the board of directors.

A family-owned company’s most important goal should be increasing profit and value, not providing full employment for relatives, Michaud says: “In the end, every family member should hope you have the best CEO possible to generate a lot of revenue, have an impact on the community, and have the opportunity for jobs for themselves and the next generation.”  

Chana R. Schoenberger has been an editor at Forbes, an online editor for the Wall Street Journal, and a news editor for Bloomberg News.