Succession planning in family businesses: How to ensure effective communication between generations

Dietmar Arzner, Head of Wealth Planning & Strategic Solutions at LGT in Liechtenstein, has seen how easily conversations on succession can go off course. One case in particular has stayed with him.

A son and daughter, both in their mid-thirties, had done everything their family could reasonably expect of future successors. They had completed their studies, worked in the family business and gained experience elsewhere. At a certain point, they told their father that they wanted to join the management team soon and that ownership of the family assets, including the business, should be transferred quickly.

It did not go well. The succession process was put on hold. And although the family eventually found a way forward, years were lost.

"Both generations wanted exactly the same thing, but they failed to communicate it the right way", says Arzner. The younger generation had raised the issue too forcefully. The older generation, meanwhile, was not yet ready, even though there was already a clear plan to gradually bring the next generation into the business and hand over management responsibility and company shares.

It is a challenge many families are facing. In Germany alone, almost half of family firms are set to undergo a transfer of ownership or shares between 2024 and 2027, according to a survey by Germany's Foundation for Family Businesses. The German Institute for Economic Research estimates that around EUR 400 billion is currently being passed on each year through inheritance or gifts. For entrepreneurial families, preserving the business and passing on both the company and the family's wealth to the next generation is not a side issue. It is a core responsibility. Yet many families find it difficult to talk about it.

Dietmar Arzner

Dietmar Arzner is co-Head of Wealth Planning & Strategic Solutions at LGT Bank in Liechtenstein. His responsibilities include providing comprehensive advice to high-net-worth families, foundations and family offices in the areas of strategic wealth structuring, wealth planning and asset allocation.

When succession planning in a family business fails

In theory, it should be the older generation that starts the conversation. In practice, however, that often isn't the case. Arzner says he sees this pattern repeatedly. "In family businesses in particular, the older generation often harbours a latent, unspoken fear of letting go and passing on the baton."

This hesitation is not difficult to understand. Succession is never only about governance or ownership. It is also about identity. For the generation stepping back, the company is often far more than a commercial asset. It may be the work of a lifetime, the source of status, purpose and routine, and the structure around which life has been organised. "There is a fear of becoming irrelevant", says Arzner, "of no longer having a meaningful role in the family business if they let go of the reins too early."

The next generation has its own anxieties. "They fear being accused of wanting to take over too soon, of being too impatient, too greedy or disrespectful in some way", says Robert Rowland Smith, an adviser on wealth dynamics in the UK and internationally, who advises family businesses on managing human dynamics.  

This is what makes succession in family firms so combustible. The discussion touches status, authority, loyalty and mortality. "In a family, people are connected not only through business, but also through blood ties", says Rowland Smith. "When you tell your parents that you're ready to take over, it's as if you were saying: Now it's our turn."

Rowland Smith has witnessed how quickly such discussions can go wrong and lead to rifts in families. A few years ago, he worked with a family in the United States that began discussing succession over dinner. It ended in a family row and they didn't speak to one another for a year. Why? "The conversation was handled very clumsily and emotionally, which led to personal accusations and brought old grievances from the past back to the surface."

Addressing generational shifts: How the next generation can start the conversation

So what is the younger generation meant to do when the older generation avoids the subject altogether?

Arzner's advice is straightforward: "The first thing is to make it clear to the older generation that you want to learn from their experience", he says. How did they make the business successful? How did they take important strategic decisions? "Don't begin by saying you want to take over. Start by saying you want to learn."

This is especially important when potential successors have not followed an obvious or linear path into the business. Perhaps they had other interests, chose a different course of study or started out in another profession. If the wish to get involved comes later, they need to show that they are serious: willing to learn the business gradually, keen to contribute ideas and experience of their own, and open to feedback. "If the older generation senses that the interest is genuine, the conversation often moves forward very quickly."

What should be avoided are opening lines that sound like demands: "I need access to the figures and accounts"; "I want to play an active role"; "I want to make decisions"; or "My view is completely different". "Being demanding without first engaging the senior generation is a cardinal mistake", Arzner says.

Rowland Smith makes a similar point, though in slightly broader terms. "The first step should be to understand the situation and find out where everyone stands: what does each person want, what are their intentions and what do they care about? Start by asking questions, rather than jumping in with suggestions and solutions"

The right setting: The first family discussion

But asking the right questions is only part of the equation. If the younger generation decides to take the first step, they should also think carefully about timing and setting.

"I wouldn't recommend doing it over Christmas dinner", says Arzner. The temptation is understandable: the family has gathered, everyone is there and the subject may well have been hanging in the air for years. But that is precisely why it is a bad idea.

Far better, he says, is to choose a time when things are calmer both at home and at work, and to meet somewhere private and neutral. "Not necessarily at the office, perhaps in a hotel with a meal the evening before the conversation", he advises. Ideally, the family should set aside two days, and the older generation should be given advance notice of what is going to be discussed, so that they have time to reflect and prepare.  

The same principle applies here, too: when the younger generation raises the subject, they should make it clear that they want to learn and that their interest in the future is genuine. When the conversation takes place, they should also express respect and acknowledge what the older generation has built.

Involving a third party is not always necessary for an initial conversation. But as the process unfolds, outside support can be invaluable. That might be a trusted individual, a specialist from a bank or an advisory firm, or a moderator who can give the discussion some structure, keep an eye on time, make sure no one person dominates and ensure that important points are recorded in writing. "The aim is for the person acting as a mediator to look at the situation objectively while also keeping a close eye on the interpersonal dynamics."

Once the first conversation has taken place, families often find that the next steps are clearer than they expected. In many cases, the hardest part is not the succession plan itself, but finding a way to get the conversation started.