Family businesses have long been the backbone of Malta’s economy, with a number of them dating back generations.
This tradition of entrepreneurship has not only contributed significantly to the country’s economic growth but has also played a pivotal role in preserving Malta’s cultural heritage. These businesses often merge modern business practices with traditional values, creating a unique blend of innovation and stability.
We associate the family businesses with strong bonds and shared values which are a powerful driver for business success; flexibility and adaptability in the operation of the business which are essential for survival in today’s ever changing world; and loyalty and trust which lead to enduring customer relationships and a motivated workforce.
Running and managing a family business though, has its own challenges. Striking the right balance between family dynamics and business operations can be challenging. Personal conflicts can spill over into the business, affecting decision-making and overall performance. Equally arduous is planning for the transition of leadership and ownership to the next generation. Clear succession plans and open communication are crucial to ensure a smooth handover. Businesses are generally faced with what is known as the “third generation rule” – the majority of businesses face difficulties in maintaining success by the time the business reaches the third generation for a variety of reasons. To overcome the pitfalls associated with the third general rule, family business should seek to begin succession planning as early as possible.
One of the most compelling reasons for early succession planning is to ensure a smooth transition. Succession is not just about transferring ownership; it involves passing on institutional knowledge, relationships, and the values that have made the business successful. By starting early, family businesses can take the time to identify and groom the next generation of leaders, allowing for a gradual and seamless handover. This is not a one-time event; it’s an organic process that constantly evolves and requires all persons involved to participate to ensure that the skills and capabilities of future leaders are properly developed. Starting early gives the next generation the opportunity to gain the necessary experience, education, and training to excel in their roles. It also allows for mentoring and coaching to help them grow into effective leaders. Succession planning is not just about selecting a successor; it’s also about identifying potential risks and developing strategies to mitigate them. These risks can include disputes among family members, tax implications, and financial challenges. Early planning allows for the development of contingency plans to address these issues and reduce potential disruptions to the business.
Planning for succession at an early stage would safeguard the continued existence of family businesses for generations to come, preserving their legacy and contributing to Malta’s economic prosperity.
Part 2 of this article will focus on the need of family businesses to professionalize their operations and strengthen their governance as they evolve.
This article was first published on Business Today on 21/09/2023.
Authors: Simon Schembri (Partner, Ganado Advocates) and Philip Mifsud (Senior Associate, Ganado Advocates)