Yesterday I enjoyed delivering a presentation on Succession Planning in Family Business, in an training seminar organised by the Malta Business Registry and the Family Business Office. During the presentation delivered, I explained all of the below.

Succession planning is a critical process for family businesses, yet it is often misunderstood or neglected until it is too late. Many family business owners hold an “idealistic & romantic” view of succession, imagining a smooth, unquestioning transfer of power to a single successor, much like the depiction in the film “The Lion King”. The expectation is that one clear heir will take the helm, with family and other stakeholders readily deferring to them, and respect flowing freely across generations. Over time, often “WAY too late,” owners realise this romantic vision will not work and become worried. Despite its importance, succession planning is frequently left “by the wayside” until it is too late.

A successful succession plan needs strong foundations. These include a range of elements that support the transition process:

• Corporate Governance: This encompasses establishing a clear Strategic Vision, managing Risk, setting up Governance Forums for effective communication, ensuring Strong Financial Stewardship, and implementing Leadership Development programmes.
• Policies and Conflict Management: Having the right policies, such as a dividend policy and a family employment policy, is essential to manage conflict. Access to mediation help is also beneficial. Clearly defining roles, responsibilities, and conducting unbiased evaluations of contributions are necessary to manage conflicting interests that often arise in family businesses. These efforts, backed by clear policies, reduce the risk of conflicts.
• Transparent Communication: Encouraging open dialogue within the family is vital to foster trust and transparency. While familial bonds are important, they should not compromise the necessity for a competent future leader. Initiating the succession dialogue early on, in an open and transparent manner, is essential to prevent misunderstandings and facilitate smoother decision-making later.
• External Professional Help: Cultivating a culture that embraces external professional help is important. Engaging professionals can assist family businesses in improving operations, resolving conflicts, and promoting fair decision-making. This professional support can help foster mutual respect and consensus among family members, leading to fewer challenges during the succession planning process.

The Succession Journey: Process and Questions

Succession planning as a journey. It is a process that requires considerable work and commitment to find solid answers to complex and difficult questions. These questions include:

• What do you want to do with the assets and business you worked so hard to build?
• How do you plan to REALLY let go?
• What roles should the next generation play now and in the future?
• How should you develop members of the next generation into those roles?
• Are the relationships between yourself and the next generation, and among the next generation, strong enough to navigate succession-related decisions together?

Options for Business Succession

The are several strategic options for the future of the family business with regards succession:

• Sell to an Outsider: Selling the business may be considered for various reasons, such as a bleak competitive position, a compelling offer, excessive conflict within the owner group, or a lack of interest or skills in the next generation to own the business together. A key piece of advice if exploring this option is to continue running the business as if you will always own it to keep it healthy, especially in case the sale falls through. Discussions should be restricted to owners and the board to avoid unnecessarily distracting the management team. Owners must also be prepared to accept whatever the buyer decides to do with or transform the business into.
• Divide Among Next-Generation Members: This involves splitting the business itself among the members of the next generation. There are multiple ways to achieve this, but it results in each family branch charting its own course rather than having a shared family business. Partitioning can minimise conflict, but it has downsides, such as the effort and resources expended on the split potentially hindering growth. This approach is also difficult to replicate with future ownership changes.
• Transfer the Entire Business: This option involves passing the whole business down to the next generation. This decision should be deliberate, taking alternatives into account. The current owner controls the decision of whether to transfer and to whom, as well as the process itself, including asset distribution, legal vehicles (like trusts), timing, leadership selection, and role handoffs. As part of this, owners could transfer ownership but leave a non-family management team in charge.

Common Problems Encountered in Succession Planning

Several common problems can make succession planning difficult and cause the process to become “stuck”. A stuck family business is like a perpetual tug-of-war with no progress.

• A Present Leader That Can’t Let Go: Some family business leaders rule with an “iron fist,” micromanaging and exhibiting tough behaviour towards the next generation, who find it impossible to thrive under such leadership. This oppressive behaviour can make the next generation incapable of leading or so hurt they lose interest, often leading them to sell the business. Owners might also try to “rule from the grave” by setting rigid rules through formal means like trusts or cultural expectations to protect their creation and help the next generation avoid mistakes. However, these attempts often backfire by removing the next generation’s autonomy and ability to adapt to changing circumstances. Trusts, in particular, can be very difficult to undo.
• Unable to Strike a Balance Between Control and Collaboration: Conflicts over power and control are common in any organisation, but family dynamics can exacerbate them. Succession planning needs to establish a timeline for responsibility assumption and criteria for decision-making authority. Clearly articulating desired outcomes allows emerging leaders space to exercise autonomy while pursuing shared objectives, balancing the founder’s strategic aims with the next generation’s execution flexibility.
• NOT Embracing the Next Generation’s Perspectives: Failing to include the next generation’s ideas in conversations about shared values is a problem. Research suggests family businesses with written values are better prepared for succession and are more communicative. Engaging the next generation early fosters collaboration, helps them see how they can contribute in ways that support their aspirations, and builds trust, transparency, and alignment. Co-designing a common purpose based on shared values is key.
• No Flexibility! While governance, structures, roles, and processes are important, they should not be rigidly maintained if they worked for a previous generation. Lack of flexibility, even with good intentions, can set the younger generation up for failure by preventing them from developing their own leadership approach. Each generation brings different skills and interests, and the business itself may need different leadership skills over time. Assuming what worked before will work again is a mistake.
• The Chosen One: Some families have a tradition, even with shared ownership, of putting the eldest male in charge, sometimes with a greater ownership stake. This can avoid succession battles as roles are known early. However, designating a successor at birth often creates more problems than benefits. This “chosen one” might not be the best candidate, which is often implicitly recognised, and places great pressure on that individual. The rest of the family can feel disengaged and resentful.

When these problems lead to a family business becoming stuck, the only way forward is to achieve a shift through the agreement of all owners, finding common ground through conversations.

Common Solutions: Aligning Interests and Building Capability

Addressing these problems involves several common solutions, often centred around aligning interests and preparing the next generation:

• Aligning Interests through Asset/Ownership Distribution: Owners can divide assets or business ownership based on recipients’ interest, commitment, and capabilities. Some children might inherit shares while others receive outside assets. To maintain power later in life while distributing economic value, owners might pass down economic interests (e.g., via nonvoting shares) while retaining voting control. Alternatively, using a “cash up, equity down” approach allows current owners to receive income over time while passing down ownership and its associated risk and equity appreciation. This can involve structuring transfers through methods like pulling out real estate, arranging directors’ fees, or using preferred shares structured like bonds.
• Bolstering Intergenerational Solidarity: Academic research highlights the importance of early exposure and emotional commitment. Engaging the next generation at a young age and having ongoing conversations about joining the business helps build a strong foundation. Families successful at succession often discuss growth opportunities, competition, sacrifices, commitment, firm history, and the ups and downs of a family business with the next generation. They actively help the next generation explore how their priorities align with the company’s goals and aspirations. Successful plans include building bonds and negotiating win/win scenarios for joining the enterprise.
• Embedding High-Trust Behaviours: Trust is crucial for any high-performing team and particularly powerful in family business transitions. A succession plan needs to be built on sincerity, reliability, competence, and care. Sincerity is consistency between words and actions. Reliability is keeping commitments. Competence is having the skills and capacity to deliver. Care means having the other person’s best interests in mind. Optimal plans include concrete ways to build trust, competence, and credibility to ensure both generations can transfer power and authority with confidence.
• Co-designing Standards for Readiness: A key concern is assessing the next generation’s readiness. Research indicates that 25% of failed transitions are due to a lack of a prepared heir. Co-designing readiness standards helps parties align and gain confidence. Definitions of preparedness can vary greatly among families (e.g., requiring outside work experience, starting at the bottom, or completing an MBA). Having detailed conversations about specific standards for critical roles manages expectations and prevents misunderstandings. Succession planning must include desired skills, attributes, and work experiences to plan a timely transfer. Preparing emerging leaders responsibly requires early planning, timelines, and ongoing preparation from both generations.

Core Ingredients for a Successful Succession

A good succession is likened to passing the baton in a relay race, involving three aspects: preparing the current leader, selecting the successor(s), and planning the handoff.

• Preparing the Current Leader: Gracefully transitioning out of powerful roles is a profound act of leadership, though not easy. Current leaders may know it’s the right thing but struggle to let go, questioning how their identity is tied to the business or feeling pushed by the younger generation. A well-prepared leader creates a “glide path,” a five- to ten-year plan to move away. This major life change requires support from peers (advisory board, trusted adviser, coach) and the involvement of a spouse.
• Selecting the Successor/s: This is one of the most challenging and potentially contentious aspects. Choosing a successor without damaging family relationships can be difficult. Key principles include making them earn the position, establishing a clear and transparent process, ensuring alignment with the Owner Strategy, avoiding the temptation to “clone” oneself, and considering outside board or business leadership if no family member is qualified.
• Train & Build Capabilities of the Successor/s: Shaping the next generation requires early engagement and preparation for future roles. Training should cover business ownership skills (financial statements, legal structures), family business principles (governance), knowledge of family assets (shareholder agreements, key managers, strategy), family history and values (family constitution), and personal leadership competencies (conflict management, team management). Importantly, they must also learn to Collaborate. Relationships between the next generation should not be left to chance; create spaces for them to practice making decisions together early on with lower stakes.

Key Takeaways: Don’t Leave it on the Back Burner

Succession planning should not be left on the back burner. It requires buy-in from the next generation, not just the current owners. It needs dedicated time on the agenda with a deadline, as continuity planning discussions are often delayed otherwise. Remember that transition is a process, not an event. There will be steps forward, backward, or sideways. Look for concrete markers of progress (revised shareholder agreement, new governance structure) and adapt to evolving circumstances, such as a next-generation member showing unexpected leadership.

To overcome initial resistance, particularly from current owners comfortable with the status quo, consider working backward. Start by asking the next generation how they will work together when it’s their turn – how they will make decisions, structure the business, and define success. This prepares them without immediately threatening the current setup and creates clarity for the future. In parallel, ask the senior generation about their vision fifteen years out when they have stepped back, and then work backward to determine what needs to happen to reach that future state. This approach can make the transition seem less threatening than focusing solely on what the senior generation must give up today.

Ultimately, Succession Planning is a Journey and not an Event… so you can never really start too early.