Succession Planning in Family Business

Written by Michael Warrington, Chief Executive Officer  AX Group

In Malta, most local businesses are family-owned and managed. Many of the businesses are passed from one generation to the next. A relatively small percentage of businesses make a successful transition to the next generation. The reasons why so few transitions succeed are varied. Internal family differences often play a major role in the demise of successful businesses.

Finding the right balance between the business needs and the family perspective is never an easy task. The family interactions and motivations are normally very different from those of the business. The challenge is to balance the interests and conflicting goals of family and business.

Although many business people talk of succession planning, in practice there is a significant difference between what the owner/manager perceives and what needs to be done in reality to ensure the continued success of the business and the maintenance of a healthy family rapport.

Succession planning needs to commence at a very early stage in a business-owning family. Children are naturally curious about their parent’s work. Many founders of successful family businesses find it challenging to balance the family needs and the business demands. The consequence is that one or the other gets more attention at one time or another. These compromises are then the root cause of the long term issues that undermine family unity and ultimately the business.

There is no universal route to success. Every family needs to discern and discover the path to adopt to optimise the probability of the business surviving a transition from one generation to the next.

Here are some suggestions on strategies that should increase the probability of a successful transition.

1. Freedom of choice

Every parent will tell you that each of their children is different and unique. Much as the founder of a business may wish that their children will follow in their footsteps and do a good job of it, it is not a given. From an early age, children need to be allowed to understand that they are free to determine their life’s journey, that success is not only determined by them being active in a family business nor that there is an automatic place for them in the business.

2. Family and corporate values

Strong businesses are those that adopt family values and apply them within the organisation. These values guide the employees and stakeholders who interact with the company on what can and cannot be done. Businesses then set the tone on the work ethic, loyalty, honesty and integrity expected from both the family members and employees.

3. Meritocracy

Businesses tend to do well when authority and responsibility are determined on the basis of merit. Hard as it may be for family members to accept, it is in the long term interest of the family as much as the business that people are appointed to positions of authority on the basis of their competence and skill.

4. Setting the rules – The family charter.

Developing a family charter which is a document that sets out some key principles that each family member should understand and follow is also an important milestone for success. The charter would reflect the family values and set rules on everything from ownership rights, active participation in running the business and passive ownership, appointments to key roles within the business, engagement and participation of spouses and children in the business, compensation and drawings from the business, the resolution of disputes and non-competition with the business interests.

Most family-owned companies start off with a single founder or a founding couple. The founders are usually ambition-driven, passionate and very focused on the success of the business. They are usually very hopeful that their offspring would be inspired by the business and choosing to stay in it would be a natural choice.

The hardest part of the transition process is letting go. The founders are often reluctant to let control out of their hands. The ease with which they can do so is determined in a process very similar to when their children took their first steps to start walking – the initial interest, learning the ropes, building confidence, failing and trying again – with the firm but gentle hand of the parents to guide the children along.