Family business succession: managing generational change

Every year, many family businesses in Germany face the challenge of generational change. Only some of them remain under family leadership. Others resolve the succession question by appointing external managing directors and so keep ownership of the company. For a considerable share, the succession solution is a sale of the company, and a smaller share of businesses have to liquidate.

The tragedy is that owners often greatly overestimate the value of their company. This puts their own retirement provision at risk.

The change of leadership raises existential questions. It has to be clarified who is suited to succeed, and whether only sons are considered or daughters are also trusted to lead the family business successfully. It is also open with what attractive vision of the future the next generation wants to continue the company, and how it needs to be set up to meet the challenges both internally and externally.

Mid-sized companies (Mittelstand) therefore face the task of shaping generational change in a way that secures the company’s continued existence and preserves for the family the assets built up over many years.

The transition to the next generation involves many processes of adjustment that have to be managed. To release new energy, the next generation must, for example, succeed in breaking away from the patterns of the old generation. This is both a crisis and an opportunity.

Alongside all these challenges, the next generation must not underestimate internationalisation. Markets are growing ever closer together. Companies therefore need the competence to think and act in other languages and cultures. Language skills play an important role here. An even greater task is bringing together different values and patterns of thinking.

In many family businesses there is a wish to settle succession from within the family. In the process, it can be ignored that the entrepreneurial and professional qualifications of the succeeding relatives are objectively relevant to the company’s continued success.

Naturally, business owners are afraid of making a mistake in choosing a successor that would endanger the company and the jobs of long-serving employees. They know their company like no one else and doubt that it will run smoothly without them.

All too often, they then expect a mirror image of themselves, ideally free of their own mistakes and weaknesses and a generation younger. No potential successor can meet this standard.

If inner fears about the time afterwards are added, that is, about their own search for meaning after a successful handover, this can unconsciously have a massive influence on the succession process.

If the successor is to come from the family, family and emotional aspects become relevant alongside factual and personal ones. Family issues then automatically carry over into the working relationship, which can make cooperation in the company considerably more difficult.

At the two extremes, it looks like this: either the weaknesses of one’s own children are completely overlooked, or the children are simply not trusted to run the company. Both views can place a considerable burden on the company’s success and on family peace.

In summary, generational change and change of leadership must be planned and prepared over the long term in order to make the transition to the next generation a success.

Many family businesses can serve as best-practice examples here. In addition, there is a whole range of useful research findings on how a handover process can be planned and implemented with good prospects of success.

Generational change is present in one way or another in every business family. Nevertheless, concrete measures to actively search for successors and to qualify suitable successors are often neglected. The planning process in particular appears to need improvement, with a view to deliberately preparing company handovers over a longer period.

Many business owners also cannot let go of their function and role in the company, which has fatal consequences for the entire handover process. From a human point of view, this is easy to understand. Many entrepreneurs have invested a large part of their life’s energy in their company, and the company is hard to imagine without their personality.

At times one gets the impression that these business owners consider themselves immortal. They fail to recognise the associated dangers and unintentionally harm the company and the business family, even though their personal commitment aims to achieve exactly the opposite.

This difficult situation can often be influenced positively if the next generation manages to honour the life’s work of the parent generation. This includes expressing due appreciation for what the parents have built and are handing over.

In the succession process, seven questions have to be worked through and answered. The first concerns ownership: should the company be transferred to family members or sold?

The second question concerns the management of the company. It has to be clarified whether a family member or a manager from outside the family system takes over leadership, and whether the family has suitable successors.

The third question concerns capability. It has to be determined how capability is established, who makes the decision and how the qualification programme must be structured to prepare the successor appropriately for the tasks.

The fourth question addresses the vision of the future with which the company is to be continued successfully. The fifth asks how the company needs to be set up in order to meet future challenges.

The sixth question concerns the management team. It has to be determined which key players are needed to build a team that, taking into account the successor’s abilities and personality, successfully copes with the complexity and challenges of the times.

The seventh question is how the withdrawal of the parent generation and the introduction of the next generation are planned.

To work on the questions relevant to the family business, suitable interventions have to be made, settings designed, and communication structures and communication platforms established. The questions are worked on within a suitable architecture for an orderly handover process.

In designing and working within this handover architecture, the paradoxes typical of family businesses must be taken into account in particular. They lie in the interplay of company, family and ownership.

The processes of handover begin in the minds of the people involved. Fantasies and patterns of thinking affect the reality of action. This needs to be looked at closely. Anyone who thinks in patterns of “right” or “wrong” and “guilty” or “innocent” forgoes opportunities for a successful generational change.

Succession arrangements must take into account more than economic, tax and company law aspects. If the entrepreneur or leader wants to withdraw from operational business, this has considerable consequences for them, for the company and for the business family.

The forthcoming process of change should therefore be planned so that the reorganisation within the business family and the company leads to a reorganisation of the subsystems that meets future challenges. The subsystems are the business family, the shareholders and the company.

This process of change is usually accompanied by emotional rejection, by irritation inside and outside the company, and by economic risks.

For the company to continue successfully over the long term after the parent generation withdraws, ten prerequisites apply, among others. The owners are in agreement and present a united front. There is a jointly agreed family constitution and corporate governance. Corporate goals and strategy are clearly described and supported by the owners and all key leaders.

The inheritance arrangements are settled and do not lead to unnecessary uncertainty. There is effective controlling through internal or external resources, for example auditors. The economic framework conditions are settled and competitive. These include the equity ratio, liquidity, withdrawal policy and willingness to invest.

The new generation of entrepreneurs is involved in the reorganisation of the company and prepared for its tasks. It has the opportunity to obtain neutral advice without risk. The communication process between the parent generation and the next generation is settled, regularly evaluated through reviews and corrected where necessary.

Expectations, fears, personal views and fantasies are expressed openly. The withdrawal of the parent generation is orderly but consistent and takes place with great appreciation.

In advising and supporting generational change and handover processes in family businesses, transformis draws on the findings of many years of research on family businesses by Rudi Wimmer, Fritz Simon and Arist von Schlippe.

Supporting a generational change covers several areas of work. It starts with drawing up a family constitution and corporate governance, and with identifying the strategic challenges and the resulting requirements for functions and function holders.

This is followed by drawing up a requirements profile for the successor. In addition, there is advice on searching for and selecting suitable personalities as part of the succession process. The strengths and development needs of existing key players are identified.

Another area of work is support in developing a vision of the future that takes the relevant environmental conditions into account, and in implementing it. The existing organisational design is reviewed and adapted, and qualified management teams are built.

On the people side, this includes assessing the potential of existing key players in the company and specifically developing potential candidates. Succession planning is drawn up and implemented on the basis of the organisational challenges and the existing potential of key players. Finally, it includes advising the business family itself.

Generational change involves risks for the business family, the company and the people involved. Nevertheless, practice shows that it is possible to plan generational change over the long term and implement it successfully.

This secures solid asset growth for the family and the shareholders. In addition, the business family retains the recognition associated with its role.

The importance of consensus within the family and of a good feeling among employees and other stakeholders, who watch the process of generational change critically, should not be underestimated either. A well-planned handover process significantly reduces the likelihood of failure.

If generational change is well prepared and implemented, it builds trust among all stakeholders. For the business family and the next generation, this creates human and economic benefits, resulting in a higher quality of life.

These considerations draw, among other things, on work by Rudolf Wimmer and Annette Gebauer on succession in family businesses and on work by Arist von Schlippe on areas of tension, dilemmas and the management of paradoxes, and on conflict situations in family businesses.