Succession is undoubtedly one of the most challenging events in a family business. As a result, there are numerous practical recommendations on this topic (e.g., regarding the tasks that need to be completed). However, most of these recommendations are based on the traditional Western ideal of the family—that is, a nuclear family with one or more biological children. This does not necessarily reflect reality, however. Rapidly changing family dynamics, including blended families with stepchildren and adopted children, present additional challenges for entrepreneurial families. Conducting a fair succession process becomes more complex in these family constellations, as they carry a high potential for conflict.
If these potential conflicts are not resolved, the family’s continued influence within the company may be jeopardized. We want to offer our readers some practical advice on how to avoid the most common pitfalls in the event of an adoption or divorce. To develop suggestions and food for thought, we first summarized the existing research on this topic and then interviewed 13 members of entrepreneurial families who have experience with adoptions and divorces.
Blended families vary considerably in their ability to carry out a smooth and successful succession process that is perceived as “fair” by the parties involved. All members of entrepreneurial families and all family business advisors know this: every member of the next generation is different. Members of the next generation differ in their personal motivation to join the family business, based on their character and preferences. In blended families, however, factors related to adoption and divorce can also influence the children’s interest in the family business. While the first category of differences can hardly be influenced by external factors, the differences arising from the second category can and should be addressed to ensure a fair succession process. In particular, members of the entrepreneurial family must pay attention to four key aspects: value constructs, personal connections, presence during the socialization phase, and identification with the family business. In addition, three problems should be avoided: parental conflict, geographical distance, and a lack of socialization in cases of adoption.
Similar Value Systems
Whether members of the next generation perceive a succession process as fair depends on whether they share similar values regarding family and the business. Many of the owner families observed cited “down-to-earthness” and “respect for the business” as core values. They also reported on the importance of religious (primarily Christian) value systems that shape their personal lives.
Succession was considered “fair” when the next-generation family members held similar values. We found that upbringing had a major influence on whether or not the values of the next generation converged. The reason for this is as follows: Values are primarily passed on through the example set by the older generation and others in the family’s environment—in accordance with the principle that “words must be followed by deeds.” In cases of divorce, children were often exposed to two very different environments—and thus values—as they grew up. Depending on how old the children were at the time of their parents’ divorce, their values may have been shaped very differently. The parent generation should ask themselves the following questions:
• Critically assess the values within the various parts of the blended family (including the values of the new partners of divorced parents): Where do they align? Where do they diverge?
• Communicate openly about important values in the event of a divorce
• Joint custody can also be beneficial for familiarizing children with similar values—and thus preparing them for the future succession process
• Think creatively about how to instill values and traditions that may have been missing in the event of an adoption.
• Always remember: Children follow their role models.
• In the event of a divorce, try to ensure that all children have a close relationship with the “entrepreneurial” parent.
Personal Connection to the Owner Family
In addition, regular contact with members of the owner family is important. This fosters mutual understanding and the sharing of traditions. There are various ways to ensure such ongoing, personal contact: informal family gatherings as well as more formal family events. Particularly in cases of divorce, formal, pre-scheduled family gatherings have proven to be an effective measure for maintaining close contact. The following recommendations arise:
• Ensure regular and frequent contact among all members of the owner family.
• Living in close proximity is beneficial for fostering personal bonds with the owner family—and can be taken into account when considering a move or boarding school.
• Regular family gatherings help maintain connections even during difficult times. Consider both formal meetings and informal family gatherings.
Socialization Within the Family Business
In addition to family ties, divorce and adoption often influence whether and how the next generation of family members is “socialized” into the family business. By participating in meetings, representing the company at events with clients, or simply interacting with the family business’s employees, members of the next generation gain valuable insights into the company. Potential successors familiarize themselves with work processes and the unique corporate culture. In doing so, they expand their knowledge and skills relevant to leading the family business. The degree of socialization within the company thus influences how ready and capable the children are to take over the family business. Information asymmetries among children in blended families can lead to a perceived sense of injustice in the succession process, making it even more difficult. To avoid such challenges, the following recommendations should be followed:
• Provide members of the next generation with sufficient information about the family business. Ensure that all members of the next generation have equal access to information.
• Ensure that access to work opportunities is fair and equal for all children, including those who live farther away. The same applies to company events, etc.
• Aim for balanced skill development within the next generation. An ownership strategy can be helpful.
Identification with the Family Business
Divorce and adoption can make it difficult to build an emotional bond between the next generation and the family business. For example, if the topic of “adoption” plays a (too) prominent role in family conversations, this can cause the adopted child to distance themselves from the business. Whether adoption was a central theme in the child’s daily life is also reflected in the last name. It is worth noting that in both adoption and divorce cases, the last name has a major influence on the next generation’s identification with the business, especially if the business is named after the founding family. We propose the following recommendations:
• Critically assess the extent to which members of the next generation identify with the company. Try to achieve a healthy balance among them.
• Even though it is a sensitive topic, you should try to give all children the same last name—regardless of whether they have different parents or are not biological children. This fosters a similar sense of identification.
• Do not make adoption a central topic in family discussions.
Conflict Between Former Spouses
Divorces often end with conflicts between former partners that can be highly emotional. Such a conflict can lead to the alienation of one or more children from the family business. To avoid such problems, it is important to distinguish between the level of the partners and the level of the parents. A divorced couple with children should always interact with their children on the parental level. The cases we observed differed in how successfully the divorced couple was able to keep emotional disputes away from their children.
A conflict-ridden entrepreneurial family found a remarkable way to ensure ongoing communication with all of their children. Since the parents were unable to discuss the family business with the children, other family members took on this role. Aunts and uncles, in particular, can take on the role of “neutral,” ongoing communicators, thereby bypassing the divorced, quarreling parents. We offer the following recommendations:
• Develop a communication strategy. In addition to determining what should be communicated, you must also define the responsible individuals and the communication channels. In the event that the parents are unable to communicate with each other, you should establish a “bypass” that includes other trusted family members.
• Use prenuptial agreements that ensure custody arrangements and the continuity of contact in the event of a divorce.
Geographical Distance from the Owner Family and/or the Family Business
Geographical proximity fosters a personal connection to the owner family and facilitates contact with the family business. However, this proximity is lost if, for example, divorced parents move to distant cities or even countries. In such cases, not all subsequent generations have the same opportunities to become motivated and competent decision-makers in the family business.
Children growing up in these situations may still perceive the succession process as fair if they receive an appropriate share of the business. However, this step carries significant risks—so there is no one-size-fits-all solution. In particular, members of the next generation who own shares but lack a strong connection to the company could make business decisions that are not in line with the rest of the family. Therefore, parents must carefully consider measures that foster a sense of identity when transferring shares to “distant” Next Gens. Professionalizing the competency assessment process or requiring external work experience for careers within the family business could also make the succession process seem “fairer” from the next generation’s perspective. We recommend:
• Discuss your share distribution strategy openly within the family and have it reviewed by experts.
• Invest in identity-building measures for all children
• Invest time in developing fair evaluation criteria for decision-makers within the family. Requirements may include formal education and professional experience outside the company.
Socialization and Age at the Time of Adoption
Many entrepreneurial families have found a constructive way to handle adoption, for example, by not making this topic too prominent in everyday life. However, one aspect has complicated succession planning in several cases: the age at the time of adoption. When children were adopted at a later age, they missed out on the crucial socialization phase within the company. When children are adopted “late,” they may share different values, be unfamiliar with the company, and not fully identify with it.
As a result, some owner families exclude non-biological children from succession planning. Other entrepreneurial families define clear roles. For example, they distinguish between different reasons leading to adoption, such as a) an unfulfilled desire for biological children; b) the adoption of stepchildren; c) a desire to influence the planned distribution of shares. Many entrepreneurial families also set a maximum age for adoption, such as six years. They argue that children adopted at preschool age can still go through the same socialization phase as their non-adopted siblings. In summary:
• Discuss and define: Who is—or can become—a “full-fledged” member of the owner family?
• Develop an ownership strategy
• Define, if necessary, age limits for adoptions or the conditions under which adopted children can become full members of the owner family.
• Discuss whether different reasons for adoption can lead to differences in status within the owner family.
• Take different adoption scenarios into account when distributing shares
Conclusion
Succession remains one of the fundamental challenges for family businesses—especially when they do not involve “traditional” family structures. We hope that our insights and recommendations for action will contribute to finding constructive solutions.
This text was originally published in full and in English on the familybusiness.org platform.
