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Many entrepreneurial families struggle with succession planning. Yet it is worth tackling this issue early on.
The following case study illustrates why it is important to plan early and thoroughly.
A business owner's estate planning was incomplete, even though he had started the process well before his death. Over the years, he revised his will several times. In the most recent version, he stipulated that, in the event of his death, his shares in the company would pass not only to his biological son but also to his wife, whom he had recently married. She was to receive half of the shares.
When the business owner died unexpectedly, it emerged that there was a conflict between the company's articles of association and his will; according to the articles of association, only biological descendants could inherit company shares.
As a result, the wife could not become a shareholder and was instead entitled to financial compensation. The company therefore had to secure liquidity at short notice, threatening its financial stability.
This example is far from unique: ensuring the orderly transfer of assets can be challenging and the process is often fraught with pitfalls. The media regularly report on succession-related conflicts that lead to lengthy legal battles. In addition to incurring high costs, such disputes can also jeopardise a company's survival.
But planning an orderly transfer of assets isn't just about avoiding conflicts. In fact, when addressed objectively and fairly, differing views can actually strengthen a company's competitiveness, for instance by helping to clarify its strategic direction.
However, conflicts that arise due to a combination of both personal motives and business-related matters can have serious consequences. Such tensions often stem from past family disputes that have nothing to do with the company itself - yet their effects can ultimately harm both the family and the business.
Many successful entrepreneurial families have a binding set of family rules - in other words, a family governance framework - to help them prevent conflicts and resolve differences constructively. These families also tend to address succession early and take a forward-looking approach to the transfer of assets, ensuring they have concrete arrangements in place.
In some entrepreneurial families, talking about succession is taboo. This can lead to unspoken assumptions, for example, that the children are not interested in taking over the business, or that one of them will naturally do so. Such assumptions can later prove wrong.
A family business owner in the machinery industry had long assumed that his children were not interested in the company. His daughter, however, had in fact been preparing to take it over. When she discovered that her father planned to sell the business, she was completely taken aback. A lack of communication about a company's future not only risks causing disputes - it can also jeopardise the business itself.
It is therefore essential that business owners discuss possible options and personal wishes openly with their families. Particular attention should be paid to the family's shared values. Questions they can ask themselves to identify these values include:
Conflicts can often be avoided by establishing a binding set of rules, rights and responsibilities, known as a governance framework. For families who own a business, this framework should address four key areas: the company, ownership, wealth and the family.
Corporate Governance:
Covers management structures, supervisory bodies and professional management processes and aims to make family businesses more efficient, transparent and aligned with the interests of the owner family. The family's operational role in the company is often defined as part of the corporate governance framework.
Ownership Governance:
Establishes the family's ownership structure and rights within the company - how shares are distributed, transferred and exercised, and how the owners work together. Clear ownership governance provides clarity about ownership roles and provides a framework for managing ownership succession.
Wealth Governance:
Addresses the management of the family's overall assets across generations - not only the family business, but also real estate holdings, financial investments, etc. Its purpose is to preserve and grow the family's wealth over the long term.
Family Governance:
Defines how the family is organised, communicates and passes on its values from one generation to the next. Instruments such as family councils, family meetings or a family constitution can strengthen cohesion, minimise conflicts and foster shared values and goals.
When preparing for succession, families should also take into account the tax regulations in any relevant countries. In Germany, for example, three key aspects are particularly important:
Business assets vs. administrative assets:
When passing on a company, it is important for families to know that not all assets receive the same tax treatment. Under German inheritance and gift tax law, a distinction is made between tax-privileged business assets - those directly used in operations - and non-tax-privileged administrative assets. Administrative assets are holdings not directly required for day-to-day operations such as real estate, liquid funds or investments in listed securities. These are not, or only to a limited extent, eligible for tax relief under inheritance or gift tax rules. Families should therefore review their company’s asset structure early on and, where possible, reduce the share of administrative assets to avoid unnecessary tax burdens.
Asset inflows:
Asset inflows should also be taken into account, particularly "young" administrative assets - those added to the business assets within the last two years. Such assets generally do not qualify for tax-exemption in the event of succession and are therefore taxable. Identifying them early allows families to take measures to reduce the tax burden, for instance by reinvesting these assets in the business.
Residence of the next generation:
The place of residence or tax domicile of the next generation is another key factor. If they live abroad, this can have implications for gift and income tax treatment. Transferring certain assets to successors abroad, for instance, may be treated as a "departure" for tax purposes, meaning that hidden reserves (book profits) become immediately taxable. Families with members living in another country should therefore plan how they can make their assets and their business less dependent on the heirs' place of residence - for example, by adjusting the company’s legal structure.
Risk is part of entrepreneurship. As a result, the next generation often inherits not only assets, but also potential liabilities - for example, legacy issues that arose before a succession plan was in place and may trigger unforeseen costs.
Wills must not contradict a company's articles of association or inheritance contracts. Such inconsistencies can lead to costly legal disputes or unwanted restrictions on the company's ability to act, as illustrated in the first case study.
Conflicting contracts and unresolved legacy issues can give rise to sudden liquidity needs, as can the departure of a shareholder or heir from the family business. High severance or compensation payments should therefore be anticipated as part of succession planning. In addition, inheritance and income tax obligations should also be factored in, as they can be unpredictable.
To prevent liquidity bottlenecks in family businesses, particularly in cases where succession plans are complex, families should build an additional liquidity buffer for unexpected events. This ensures that the company remains financially flexible and able to act, even if there is a sudden need for cash.
By establishing a solid family governance framework, you can lay the foundation for preserving your family's assets, values and business, and successfully passing them on to future generations.
Our advice draws on the extensive experience of our owner family, the Princely House of Liechtenstein. We understand the many challenges that wealthy families face and can provide targeted support to help overcome them.
Professional succession planning not only helps secure the future of a family business but can also strengthen its competitiveness - provided the groundwork is laid early. Each succession is unique and requires the guidance of competent experts who can take the family's specific circumstances into account.
Once a succession plan is in place, it should be reviewed regularly and adjusted where necessary - because families evolve, markets shift and tax laws change. Ongoing planning ensures that the business can continue to thrive across generations.
