Family business: managing the transition between generations

Successful business transitions from generation to generation don’t happen by accident. Not only do the skills and talents of each generation differ, businesses will evolve, and may need fresh perspectives at different stages of their development. Successful businesses make it look effortless, but there will have been careful planning behind the scenes.

A growing number of businesses are likely to face this issue, as the great wealth transfer from boomers to millennials feeds through to the corporate world. And it’s never too early to start planning. While businesses leaders, and especially companies’ founders, often want to continue into their 70s, 80s or even – in the cases of Warren Buffett and Rupert Murdoch – their 90s, the premature death of Steve Jobs shows that this is not always under their control. Either way, the business needs to be equipped to thrive without them.

There are a range of familiar problems that thwart successful transitions, and also various strategic approaches characterising businesses that transition seamlessly. The most important, however, is also the most obvious – to plan ahead.

A range of familiar problems can thwart successful transitions, while various strategic approaches characterise businesses that transition seamlessly; the most important – and most obvious – is to plan ahead.

The perils of being a CEO

A Deloitte study in 2024 found that CEOs are more likely to face exhaustion, burnout and even early death. Another study indicated that CEOs look older than their contemporaries, and those whose industries have experienced a steep decline in share price show effects of ageing even faster. On the bright side, the Deloitte study also found that the average small business owner is happier than the average employee. Nevertheless, being a CEO can be a surprisingly dangerous activity, and succession planning cannot be left to chance.

It is evident that some CEOs take a ‘head in the sand’ approach to succession planning, avoiding complicated questions of what might happen if they weren’t around. Some may worry that having a clear line of succession could compromise their power, while for others it entails an unwelcome contemplation of their own mortality.

However, businesses that successfully manage the transition between generations are likely to have a detailed plan. Without it, they may be spectacularly lucky, but the odds are against them. It helps if the succession plan has been widely discussed and examined by all the senior leadership within the business.

No surprises

Some advisers even recommend setting up a succession committee. This can be useful in bringing diverse thinking, building trust and transparency, and avoiding biases and blind spots (particularly important for family businesses, where favouritism and other emotional factors may be a problem).

Succession should hold few surprises for those involved. No-one should find themselves at the helm of a family business in their 20s, in full charge of decision-making without knowing who to call for experience and advice. It is a significant risk to the business, but also to those involved. History is littered with the stories of wealthy offspring who inherited too much money and responsibility too young, could not handle the pressure, and killed the family business in the process.

Succession should hold few surprises for those involved.

Any succession plan needs to be shared and agreed with the broader management team, as well as with future leaders of the business. This gives time for any problems to be aired, and any wrinkles in the planned arrangements to be ironed out. It allows everyone to know where they stand and what will be expected of them.

Avoiding a wrong choice of leader

Getting the choice wrong is the frequent corollary of a failure to plan: the wrong person takes the helm, with inadequate experience and a lack of the required skills. This has become known as the ‘Fredo effect’, in reference to the incompetent middle son in Mario Puzo’s classic crime novel The Godfather. Many people have had the experience of managing around a family member who holds their position only thanks to their last name. People are often poor judges of their families’ talents.

The problem should be avoided by involving potential successors in the business early, and testing out their strengths and weaknesses. Weaknesses can be addressed in a timely way by putting the right structure around an individual, or bringing in people with complementary skills. If the problems are insurmountable, it may be possible to find a quiet corner of the business that better suits their abilities – like Las Vegas, in Fredo’s case.

A transition period is also helpful. It gives the CEO and those around them time to rethink the succession plan if the chosen individual is clearly underperforming. For example, Bernard Arnault recently appointed his eldest daughter Delphine, a graduate of Edhec Business School and the London School of Economics and Political Science, to run Christian Dior, the second-biggest brand in his luxury goods empire LVMH.

His other children are also involved in the business: Alexandre Arnault is an executive at Tiffany, Frédéric Arnault is CEO of TAG Heuer, while Bernard’s youngest child, Jean Arnault, 24, works at Louis Vuitton. Arnault may have a succession plan in his mind, but he is keeping his options open.

Talent assessment

All successful transitions will involve some talent assessment, which means identifying key roles and the most appropriate people to fill them. This is about more than just job titles, but considering the strategic drivers of the business, and may involve splitting roles. The organisational structure that has worked under a single talented CEO, especially the founder and creator of a company, may not be appropriate for the longer-term needs of the business.

The organisational structure that has worked under a single talented CEO, especially the founder and creator of a company, may not be appropriate for the longer-term needs of the business.

In undertaking talent assessment, the business can look at leadership development programmes. Potential leaders can be given specific assignments to assess their decision-making abilities and identify gaps. It can also help people build networks and examine opportunities before taking on fully-fledged leadership responsibilities.

Just as a business reviews its existing staff, monitors their progress and continually assesses their potential for promotion, a succession plan can evolve over time. Senior management gather more information on successors and their abilities, all of which feeds into the plan. This should help to ensure that the business will have the right leaders in place, ready and waiting, whenever the CEO decides to step down. Scheduling annual reviews of the succession plan can help keep the process on track.

Succession planning often involves persuading a powerful CEO that they need to envisage the time when they will no longer lead a business that may be their life’s work. There is no easy way to frame that. However, most CEOs will not need to be persuaded of the importance of preserving the business for the long term.