Many business owners spend decades building successful firms with the hope that they will one day pass those businesses on to their children. However, more often than not, their adult children don’t want anything to do with the business. Statistics show that less than a third of family businesses survive into a second generation of family ownership and only 12% make it to the third (according to management professor Joseph Astrachan of Kennesaw State University in Georgia).

Why do most family business transitions fail?

It could be because of issues within the business, such as an ineffective leadership succession plan or the failure of the owners to modernize the business over time. However, too often the failure to keep the business in the family stems from the conflicts that arise when family dynamics collide with business dynamics. The intersection of family relationships and business decisions often proves so challenging that family members believe the best way to maintain peace is to sell the business.

Though each family is different, there are several common challenges to be aware of when it comes to family dynamics. Some of the most common include:

• The sticky-baton effect. While a founder’s strong vision can be essential to a company’s initial success, this level of control may suppress other voices in the family and make it difficult to ultimately pass the baton. Business founders may talk about succession but have trouble giving real authority to the next generation. This dynamic can create a lack of trust and respect among family members due to a perception that the next generation isn’t ready to handle the responsibility.

• Confusion about family and business goals. Family members will naturally have different opinions about how to manage their businesses, but they face serious disagreements down the line if they are confused about the ownership, employment and compensation policies. When thinking about how the business is structured and managed, families should consider basic questions: Who is considered family when it comes to the business? Who can own shares and how are they passed down? How are different family members treated within the business? Families can avoid conflict if they get clarity on these things.

• Poor communication. Communication is key to a thriving family business, yet at times tensions between family members may create an environment where they no longer listen to one another. Family members may stop speaking altogether or simply get caught up in unproductive conversations that limit their ability to constructively engage.

• Changes in risk appetite. As family businesses pass ownership to the next generation, the new leaders might lose their appetite to take business risks; they may become more focused on preserving the wealth they’ve created rather than seeking entrepreneurial ways to grow that wealth. The next generation may also resist pressure by their predecessors into making riskier decisions, ones that, when poorly executed, could erode a family’s fortune.

These common situations can contribute to an environment of anxiety and frustration within the family and drive its members to give up on the business. However, these clashes are by no means inevitable. There are many ways to improve family dynamics, and ultimately, the chance of a successful business transition.

Some Families Have It Right

Family businesses that survive through multiple generations of ownership tend to have some mix of good governance for both family and business matters. Good governance means clarifying each family member’s roles and actively managing the expectations for the business. When both things are governed well, it creates a solid foundation for transitioning the business to the next generation.

Below, we explore several best practices that may help clients improve their family governance.

• Draft a mission statement. The first step in creating a cohesive vision for the business is articulating the family’s values and goals in the form of a mission statement. This will encourage families to evaluate the basic (but sometimes difficult) questions, such as why they have a business in the first place and what they’re hoping to accomplish. This written document should be reaffirmed with each new generation.

• Establish a legal framework. A formal legal document should be put in place outlining policies and procedures for the employment of family members. This could include compensation, distributions, ownership transfers and more. These policies should be agreed upon by the family and there should be clear instructions for how these policies will be reviewed and updated.

• Speak with a unified voice to the board. In order to speak with a unified family voice and point of view to the company’s board of directors, it’s beneficial to provide a forum for family members to discuss their issues—in a family assembly or council, for example. These vehicles for open dialogue can help ensure safe and productive communication among family members to address disagreements before they grow into full-blown conflicts.

• Prepare the next generation. Educating the next generation about the family business should begin as early as possible. This may be done through age-appropriate workshops, seminars or mentoring programs. Another option is a junior council allowing younger family members to learn about the family’s history, values and the business itself.

In addition to sound family governance, effective business governance is an equally critical component of the company and its successful operation. As family businesses evolve, they often develop more sophisticated boards and shift responsibility away from family toward more independent parties. This can be a helpful step in managing a business transition, as independent directors can balance the interests of different family members.

Establishing an effective governance system takes time and patience. While governance structures aren’t one-size-fits-all for every family or company, putting these structures in place can significantly increase a family’s chance of beating the succession odds. Business owners thinking about succession should be sure to consider the intrafamily relationships at play and the potential benefits of a family business consultant who can help put effective governance measures in place.

Donna Trammell is director of family wealth stewardship at Bessemer Trust.