Insiders have a big advantage for top leadership slots because they have internalized the culture. But smart companies seek bigger pools of candidates based on culture and skill. Even Microsoft, known for its insularity, investigated outside candidates. "One of the changes that's taking place in the world is that a lot of companies are looking more and more at people outside," said Lawler. "They're saying, 'I just can't rely on internal development,' because the number of skills needed—in technology, for instance—is so great."
Shamie said he's committed to the values established by his father. The company funds a Safe Sleep Campaign that has given away $1 million worth of cribs and has many long-term employees. "Some employees have been with us since the beginningmany for over 30 years," he said.
But he's not close-minded, he said, to one day passing the reigns to an outsider who could grow the company better than someone from within the family. "We always want to be that better company," he said.
(Read more: Working for yourself? Don't forget retirement)
Develop a strategy both for expected and unexpected transitions
Transitions can cause dangerous business interruptions which can put a company's future in jeopardy and can include a retirement, or a departure with a reasonable runway. But what if the CEO gets hit by a bus?
Hilburt-Davis has executives start by creating two separate columns on a single sheet of paper for the two kinds of transitions. In the case of a disaster, you might need candidates able to move quickly, or more internal candidates who can step right into a position without much training. Many major companies also have key person insurance policies that pay out a benefit in the case of an unexpected death or incapacity of a senior executive.
Plan for conflict
Movement within top management ranks typically affects both top positions at that company and at competitors—that's referred to as the waterfall effect. Take Marissa Mayer's first year at Yahoo! Recruited from Google, she pulled other Google execs with her, including Henrique de Castro, who became COO. Just last month, Yahoo! revealed he had been fired after a little more than a year and was receiving an estimated $60 million in a severance package.
The higher up in an organization people climb, the more challenging the power dynamic becomes with top-level teams, management research shows. In general, executives thrown into a new dynamic may take a while to settle in and work out issues.
When Louis Shamie passed control of Delta Children on to his two sons in the 1990s, he gave each 49.5 percent of the company, and kept 1 percent for himself—he was prepared for his sons to disagree. A few years later, when they'd settled in, he gave them each the additional 0.5 percent.
Hilburt-Davis said it's important, especially in a family-owned business, to consider the process, not just the people. The question is not: which family member would make for a better leader; the question is, what kind of leader do you need? "I tell people, let's think of a fair, really effective, really efficient process."
The bottom line, Lawler said, is "You need to be able to say, we've got the following person ready to step in, with these backups."
—By Elizabeth MacBride, Special to CNBC.com