Succession in family business

26 October 2023
Family dynasties have provided inspiration for countless stories, from Shakespeare’s King Lear to HBO’s Succession.

The financial and political stakes in these dramas are higher than most of us can relate to, but the stories do reflect the broader truth that families and their concerns have always been a major economic force. According to statistics from the 2021 United Nations Conference on Trade and Development, “two-thirds of businesses worldwide are owned or managed by families, employing 60 percent of the world’s workforce and contributing over 70 percent of global GDP.”

Economics aside, we can all relate in varying degrees to the situations and dynamics faced by the powerful families we read about, including their inter-generational and intra-sibling rivalries. Indeed, these rivalries can be as damaging to a family business today as they were hundreds of years ago.

When a business passes down the line of succession, important factors invariably come into play. Local laws and cultural nuances exist, of course, but human nature and family dynamics are similar throughout the world, with ambition, loyalty, pride, ability and jealousy all being thrown into the mix.

Finding the balance between wanting a family enterprise to continue under competent management while also giving the next generation the freedom to find their own way can be particularly challenging. In some cases, it may lead to damaging, yet avoidable, consequences, both for family relationships and the business itself.

The benefits and pressures of a family business

Inheriting and being part of a family business, especially one that has grown over multiple generations, gives a shared sense of history that drives ambition and innovation. The idea that one is part of the chain of custodianship can itself be incredibly rewarding, encouraging long-term decisions and a desire to play one’s part in leaving the enterprise well placed for the future.

On the other hand, family lore and expectations can be suffocating and constraining. There are stories of founders “arriving in the country with five pounds in their pocket” and interminable reminders of past sacrifices and successes. Family members from later generations might not have the skills or desire to continue but feel a tremendous pressure to go into the family business, especially if there are few or no siblings.

Setting succession rules

Rivalries and jealousies between siblings (some going back to childhood) can cause irreparable damage and even the destruction of a family business. This is especially the case in the oft-highlighted transfer from the second to the third generation. Here the parents can play an important, mollifying role, including setting the rules and tone for succession.

For example, Wanda Ferragamo, matriarch of the Ferragamo global luxury goods brand, mandated that only one member from each of her six children’s families could be involved in the day-to-day management of the business, and all were paid the same. To maintain the wider cohesion of the family, annual meetings were organised to keep all family members involved and informed as to the performance and strategy of the group.

The importance of advisors

Generally, family businesses that successfully negotiate inter-generational transfers develop a broad framework that allows family members to pursue their own interests. Family leadership critically evaluates the competencies of those who want to stay in the business and ensure they have suitable outside experience, avoiding any sense of entitlement. They also place non-family members in key positions where necessary.

Successful families also tend to encourage business diversification, providing funding for new ideas that are robustly and independently challenged. They typically create a forum for the wider family to gather, maintaining cohesion or, as the generations pass, developing a looser sense of family history and identity.

Third-party advisors can play a key role in supporting families while they navigate succession and other challenges. Advisors can help draft family constitutions, for example, which set out the principles to be followed both in succession for the business and related areas such as managing wealth and establishing philanthropic aims. A constitution’s drafting should be collaborative if it is to be credible and effective over the years and should include periodic reviews.

Founders and elder members of the family should actively listen to the next generation, who invariably have been brought up in a more comfortable environment and have a different view of the world given their experiences and peers.

There is no fixed template for an effective succession. That said, clear communication of expectations and ambitions from all family members, along with information and recommendations from trusted advisors, should help a family business avoid the extreme outcomes faced by many failed enterprises.

This is a slightly modified version of an article that originally appeared in STEP Journal: Issue 4, 2023.