September 30, 2020

By Louise Chakejian*

Family-owned businesses are the “backbone of the [U.S.] economy.”¹ Over 90% of businesses in the U.S. are family owned and operated, employing over 62% of the private sector workforce, or 82 million individuals, contributing over 57% of GDP, and creating 78% of all new jobs.² But, nearly 70% of family businesses do not survive the second generation, and only 12% survive to the third generation.³ Why do so many of these family businesses fail to survive? And what, if anything, can estate planners to do to fix this problem?

Family businesses are particularly vulnerable to conflict because the sharp lines of distinction between business life and family life, otherwise afforded to non-family businesses, are completely blurred:⁴ what is expected from individuals in a family sphere may violate what is expected from them as business participants,⁵ or the transfer of control from one generation to the next invites tension between family norms of equal treatment and business norms of meritocracy.⁶ That said, because “they combine the values and expectations of the workplace with more intimate family bonds,” “there may be a stronger desire for the business to continue after the founder’s death” as a way to preserve family history.⁸ However, as demonstrated by the statistics, an owner’s desire for the business to continue may never come to fruition because of the inherent conflict that threatens family business survival.

Thus, family businesses in transition offer a distinct challenge for estate planners: building a structure that helps both the business and the family thrive for generations. Estate planners understand that business owners want to preserve their wealth and minimize taxes since the business is, most often, the primary source of income for the owner’s family.⁹ However, while wealth preservation is both legitimate and vital, estate planners must approach a family business succession plan with more than an understanding of how best to retain wealth. While estate planners recognize the importance of achieving and maintaining family harmony in business transitions, exactly how planners can take an active role beyond entity, ownership, and tax planning is left unaddressed.¹⁰

I propose that estate planners can help families engage with their values to create a legacy that promotes lasting harmony or, at the very least, a foundation to guide families through conflict, regardless of the entity, ownership, or management structure. Values create the family’s legacy that will outlive their mortality and transcend generations.¹¹ Thus, focusing on preserving family values, history, and stories in addition to wealth potentially incentivizes more planning, clarifies the goals of the owner, and facilitates a more informed and trusting transition that would pave the way for long-term family harmony. By unpacking a family’s history, planners help owners think beyond the materialistic benefits that a business provides and identify their underlying values.

Values and legacy are powerful, but they are intangible. Thus, planners should codify the family’s legacy—their stories and history—in a working document known as the Family Constitution. Planners are in the best position to both encourage and draft a Family Constitution for a family business in transition. The Family Constitution contains the values, expectations, principles, procedures, activities, and decision-making processes that regulate the family.¹² It is the family version of a mission statement that serves as “the foundational document that will unify and hold [a] family together for decades—even generations—to come. . . .”¹³ In fact, one of the most important factors contributing to growth and long-term success of a family business is “[defining] family purpose and mission, family values, and the motivations and rationale for continued business ownership.”¹⁴ This shared vision, or the family legacy, reflects a shared desired future that creates direction for the family and business.¹⁵

The Family Constitution is not a legal document.¹⁶ Rather, the constitution represents a voluntary moral agreement.¹⁷ While not legally binding, it is written, agreed to, and signed by the family at the guidance of a legal practitioner. Though it contains no enforcement mechanisms, the Family Constitution is nonetheless powerful because the process of creating it helps define and impress on the family members a moral obligation that will contribute to the longevity of their shared enterprise.¹⁸ Drawing on family history and stories as inspiration,¹⁹ the purpose and mission will be based on answers to questions, such as “Who are we? What do we stand for? What do we want to do? How will we accomplish goals?” Building on those family identity questions, the family can begin to answer questions about the business, such as “What is the business in existence to do? Where does the family hope the business will go? What does the family wish the business to become?” The mere process of engaging in an initial meeting with the family to discuss broader themes and values and guide the family in thinking about its values.²⁰ Reflecting and codifying family history is most effective in the beginning of succession planning because it marks a new beginning for the family.²¹

In fact, the family and the business have a lot to learn from their history. Stories may tell how a family business was formed; the time, energy, and passion that went into forming that business; overcoming struggle and adversity; or rising after failure.²² Stories also offer insight into how the business morphed over time and the people who played a significant role in its failures and successes.²³ Reflecting on the family business history, therefore, can inspire a set of values that serve as a source of pride for the family.²⁴ In this narrative approach, the business owner can use “[s]tories to connect property to identity, so that the owner who wants to create a legacy that will last forever doesn’t simply convey the property but rather uses the property to connect what is important in the individual’s life to the beneficiaries’ futures.”²⁵ Thus, stories give life to property,²⁶ creating value that exceeds its practical purpose.

That said, families need to articulate and write down values in order to live them out because articulation of values leads to awareness and accountability.²⁷ The acts of discussing and reflecting on common values, accepting a common legacy, and signing an official document prepared by a legal planner offer the greatest protection to harmony.²⁸ Like creating a will, the process is ritualistic and cautionary, impressing the agreements made and a moral obligation to follow those agreements.²⁹ Creating the Family Constitution is the closest that families can get to preserving intangibles in a physical document. Estate planners are in the best position to make the intangibles tangible. In helping the family discover the foundation for its Constitution, and then drafting its Constitution, estate planners achieve two ends: one, helping owners confront their mortality in a way that encourages them to take an active role in creating their legacy, and two, creating a tangible plan for the family business that is built on a spiritual foundation structured to last for generations.

*J.D. Candidate, Class of 2021, Drexel University Thomas R. Kline School of Law. Louise is an Executive Editor with the Drexel Law Review. First, thank you to Professor Gordon for being my law school mentor and for guiding me in my research and writing. Second, thank you to my parents for inspiring this research and for instilling in me the values of sacrifice, hard work, and love that guide everything that I do. Lastly, thank you to my fiancé Ryan for endlessly supporting me in all my endeavors.

1 Karen E. Boxx, Too Many Tiaras: Conflicting Fiduciary Duties in the Family-Owned Business Context, 49 HOUS. L. REV. 233, 236 (2012); Family Business Facts, CONWAY CTR. FOR FAM. BUS., https://www.familybusinesscenter.com/resources/family-business-facts/ (last visited Apr. 5, 2020).

2 See, e.g., William Slater Vincent, Succession Planning for the Family-Owned Business, ABA, https://www.americanbar.org/groups/gpsolo/publications/gp_solo/2017/september-october/succession-planning-family-owned-business/ (last visited Feb. 26, 2019); Family Business Facts, supra note 1; Joseph H. Astrachan & Melissa Carey Shanker, Family Businesses’ Contribution to the U.S. Economy: A Closer Look, 16 FAM. BUS. REV. 211, 214 (2003). These statistics represent a broad definition of family businesses: the family controls the strategic direction and the family participates in the business. This definition does not detail how small businesses, defined as employing less than 500 individuals, contribute 44% of all U.S. economic economy. Kathryn Kobe & Richard Schwinn, Small Business GDP, 1998–2014, U.S. SMALL BUS. ADMIN. OFF. OF ADVOCACY (Dec. 2018), https://cdn.advocacy.sba.gov/wp-content/uploads/2018/12/21102039/rs444-Small-Business-GDP-1998-20141.pdf. Firms with fewer than 100 employees have the largest share of small business employment. 2018 Small Business Profile, U.S. SMALL BUS. ADMIN. OFF. OF ADVOCACY (2018), https://www.sba.gov/sites/default/files/advocacy/2018-Small-Business-Profiles-US.pdf. One in five, or 19.3%, of small business firms are family-owned. Frequently Asked Questions About Small Business, U.S. SMALL BUS. ADMIN. OFF. OF ADVOCACY (Aug. 2018), https://www.sba.gov/sites/default/files/advocacy/Frequently-Asked-Questions-Small-Business-2018.pdf.

3 Charles D. Fox, Keeping it in the Family: Business Succession Planning, ABA-ALI, 2009, at 2013; Family Business Facts, supra note 1.

4 See Benjamin Means, Nonmarket Values in Family Businesses, 54 WM. & MARY L. REV. 1185, 1191 (2013).

5 Id. For instance, a child who gained work experience outside of the family business and later joins the business may have an understanding of inefficient processes and professionalism and may feel uncomfortable sharing these experiences with his or her parents. See Harry Levinson, Conflicts that Plague Family Businesses, HBR (Mar. 1971), https://hbr.org/1971/03/conflicts-that-plague-family-businesses.

6 Means, supra note 4, at 1191. For instance, a business owner may want to reward his or her only son with an executive management position, when perhaps another individual may be more qualified to run the business. See Warren D. Miller, Siblings and Succession in the Family Business, HBR (Jan.–Feb. 1998), https://hbr.org/1998/01/siblings-and-succession-in-the-family-business.

7 Means, supra note 4, at 1207.

8 Sverre David Roang, Successful Family Business Transitions Depend on Three Things: Process, Process, and Process, ASPASTORE, 2010, at 8.

9 See Dwight Drake, Transitioning the Family Business, 83 WASH. L. REV. 123, 126–27 (2008); Means, supra note 4, at 1205 (2013); Astrachan & Shanker, supra note 2, at 214 (2003); Fox, supra note 3, at 2012.

10 This post is not the first piece of legal scholarship to claim that values are important in a family business or in estate planning, in general. See Linda C. McClain, Family Constitutions and the (New) Constitution of the Family, 75 FORDHAM L. REV. 833, 836 (2006); Means, supra note 4, at 1194; Deborah S. Gordon, Mor[t]ality and Identity: Wills, Narratives, and Cherished Possessions, 28 YALE J.L. & HUMAN. 265, 266; Allison Anna Tait, Corporate Family Law, 112 Nw. U. L. Rev. 1, 27–29 (2017); Benjamin Means, Wealth Inequality and Family Businesses, 65 EMORY L J. 937, 971–78 (2016) [hereinafter Means II]; Scott E. Friedman, et al., Advising Family Businesses in the Twenty-First Century: An Introduction to Stage 4 Planning™ Strategies, 65 BUFF. L. REV. 425, 445–48 (2017). This post is unique, however, in arguing that estate planners in family business succession planning play a specific, critical role in bringing those values alive and transforming the most valuable, yet intangible, assets of the family into something that the family can see and feel: the Family Constitution.

11 See Gordon, supra note 10, at 266.

12 Dennis T. Jaffe, Governing the Family Enterprise: The Evolution of Family Councils, Assemblies, and Constitutions 54 (Merrill Lynch’s Center for Family Wealth Dynamics and Governance, Working Paper, 2017).

13 STEPHEN R. COVEY, THE 7 HABITS OF HIGHLY EFFECTIVE FAMILIES 142 (1997).

14 John E. Neff, Shared Vision Promotes Family Firm Performance, 6 FRONTIER PSYCHOL. 1, 5 (2015) (quoting J. L. Ward, Growing the Family Business: Special Challenges & Best Practices , 10 FAM. BUS. REV. 323, 335 (1997)).

15 See id.

16 See Jaffe, supra note 10, at 54; McClain, supra note 10, at 845; Friedman, supra note 10, at 458.

17 See Jaffe, supra note 10, at 54; McClain, supra note 10, at 845; Friedman, supra note 2, at 458.

18 See McClain, supra note 10, at 845 (“[T]hey are meant to be “living constitutions” in the sense that they are written into people’s hearts and minds so that they become the daily constitution of everyday family life.”); Gordon, supra note 10, at 309 (explaining that in light of an “active movement” to make estate planning more “therapeutic” and “purposeful,” informal, non-legal documents may best transmit values); JAMES E. HUGHES, et al., Complete Family Wealth 148 (2018); see also 1 Frederick K. Hoops, et al., Family Estate Planning Guide § 17:1 (4th ed. 2019) (“The lawyer must be more than a mere transcribing device for the expression of a client’s testamentary desires. The purpose of family estate planning is to provide for the growth, preservation, and disposition of the family assets in a manner consistent with the expressed and unexpressed family desires. This is not an easy task. Many of the client’s unexpressed desires will never be brought to the family estate planner’s attention unless the proper questions are asked. The family estate planner must direct the client’s attention to matters which would otherwise be overlooked.”).

19 The Family Constitution could also include an addendum with photographs and newspaper clippings. Phyllis M. Cowan & Paul D. Milne, The Family Business History: A Catalyst to a Successful Succession Plan, SIMPSON WIGLE, https://www.simpsonwigle.com/sites/default/files/articles/FamilyBusinessHistory.pdf.

20 See Donald H. Kelley et al., Estate & Entity Planning: Family Business Organizations § 1:7 (2019).

21 See Cowan & Milne, supra note 19.

22 “[N]othing feels more of what a Company really cares about than its stories and legends…listening to a Company’s stories is the surest route to determining its real priorities and what symbolizes them.” Cowan & Milne, supra note 19.

23 Janice DiPietro, A Lasting Legacy: Ensuring the Future of Your Family Business, FORBES (Nov. 21, 2019 8:00AM), https://www.forbes.com/sites/forbesbusinesscouncil/2019/11/21/a-lasting-legacy-ensuring-the-future-of-your-family-business/#18aa608b6dd8.

24 See Cowan & Milne, supra note 19.

25 Gordon, supra note 10, at 283.

26 See id. at 266.

27 Ann Kinkade, All Family Business Members Have a Duty to Be Intentional About Legacy, FAM. BUS. LEADERSHIP (Sept. 2015), http://www.familybusinessleadership.org/wp-content/uploads/2015/02/AK-Values-article.pdf; JAMES E. HUGHES, JR., FAMILY: THE COMPACT AMONG GENERATIONS 142 (Bloomberg Press 2007) [hereinafter HUGHES II].

28 HUGHES II, supra note 27, at 142.

29 HUGHES, supra note 18, at 148.