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 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 has its own challenges, though. 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 generation rule, family businesses 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.
Succession is not just about transferring ownership; it involves passing on institutional knowledge, relationships and the values that have made the business successful
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.
But 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.
Managing business and family relationships
According to a survey conducted by the Malta Chamber of Commerce, Enterprise and Industry between November and December 2022, it was estimated that family businesses constitute approximately 75 per cent of businesses in Malta.
This same survey also showed that around 65 per cent do not have a written strategic plan. The numbers indicate that, while family businesses are clearly one of the pillars of Malta’s economy, governance within these businesses is clearly lacking. When one considers the underlying dynamics that exist when family and business mix, it clearly emerges that there is a need to have proper governance structures in place.
Family businesses should strive to create a proper governance structure that goes beyond the ‘family head’ role, which, in any event, will not succeed if there is no proper succession planning. However, apart from a good governance structure, family businesses need to bifurcate family matters from business affairs and all businesses should have distinct policies and procedures to achieve this aim. Failure to do so creates risks in terms of conflicts of interests and will result in poorly managed relationships and a process that is not partial.
In addition to having these policies and procedures, is the process in which decisions need to be transparent, fair and sufficiently thought out to manage the emotional factors and familial relationships, which are naturally going to be present when such decisions are being made.
This may involve the creation of a board of directors with independent members who can provide an objective perspective. In some cases, it would also be advisable that such a non-independent director acts as chairperson to manage balanced boards and ensure that deadlock situations are resolved.
In addition to ensuring that there is a decision-making process which is clear, recognising that conflicts are inevitable and implementing effective conflict resolution mechanisms is key. This will allow disputes to be addressed in a constructive and fair manner and achieving this can be either through the establishment of family councils or by appointing independent arbiters/advisers (trusted by both parties) to help navigate and resolve conflicts without harming the business’s operations, family relationships and the business’s reputation.
Family businesses also need to recognise and embrace the strong ties they have to the local community and industry. This is even more so where regulation is increasing, consumers are becoming more discerning and environmentally conscious.
Family businesses also need to recognise that good governance includes setting ethical standards and actively engaging in ESG responsibility initiatives. Demonstrating a commitment to ethical business practices and social responsibility not only benefits the community but also enhances the company’s reputation and long-term success.
Simon Schembri is a partner and Philip Mifsud is a senior associate in the Corporate Department of Ganado Advocates.