Interview: corporate succession in medium-sized companies

An interview with Dr Dominik von Au and Kai Mauden. In a state like Baden-Württemberg in particular, where the economy is shaped by medium-sized companies, succession planning in family businesses is very important.

Why is it so difficult and yet so important to confront the issue of generational change at an early stage? PwC family business experts Dr Dominik von Au and Kai Mauden explain the reasons in this interview.

Baden-Württemberg is known as the state of family businesses. How important is it to have a succession plan and ensure that the business continues?

Kai Mauden: Family businesses are an important driver of employment and the economy for Baden-Württemberg: their economic significance for the state cannot be overestimated. They not only create jobs, but also get involved culturally, socially and in the community. In the Stuttgart region, we have many family-run and foundation-owned companies, as well as larger players such as Bosch and Daimler. The rural areas of Baden-Württemberg, such as the Swabian Jura or the region between Ulm and Lake Constance, are often populated by individual, very important family businesses. If large companies were to collapse here because of a failure in business succession planning, entire regions would bleed out. Fortunately, we have rarely seen that happen in the past.

Succession planning is the ultimate discipline for family businesses. Why do so many families get it wrong? What are the typical points of conflict?

Dominik von Au: Succession planning is one of the most difficult and at the same time most important tasks in the life cycle of a family business. The future viability of the company depends on it: without effective succession, there’s no successful family business – and no successful family of entrepreneurs. A frequent cause of failure is that the company owners avoid the topic. They underestimate how much preparation time effective succession planning needs. Many companies lack a suitable successor. There are also often tacit expectations – for example, about the future direction of the company – which harbour potential for conflict. And disputes are, unfortunately, the greatest destroyer of value. I strongly recommend drawing up a family constitution. In the course of doing this, the family can come together to discuss and pin down a common set of rules, values and goals, as well as arrangements for dealing with issues relating to money and power, among other things.

Is there now a greater level of awareness that the course for generational change should be set early?

Mauden: Companies are being forced to grapple with the factors that determine the future viability of family businesses – their business model, their organisation and their cost structure. In my opinion, the pressure of the COVID-19 pandemic has led to increased awareness. In this period of intensive discussions, the question of company succession planning often arises. General social conditions have also changed: the age of patriarchs is over, and families now rely on dialogue.

What advantages does the new generation have over the older generation? Conversely, what can successors learn from their elders?

Von Au: Successors no longer see themselves as solo players. They appreciate working in teams and maintaining networks and collaboration. Their way of thinking is fundamentally different from that of their parents: the new generation is not afraid of speed or change. They use this willingness to change to adjust to new expertise and new technologies – with which they grew up anyway. These are the best qualities for surviving in the age of digitalisation, either as an entrepreneur or a founder. But the younger generation can also learn a lot from the previous generation: calmness, resilience and clarity of attitude.

Is the new generation ready to take on this responsibility?

Von Au: A resounding yes. The PwC Next Gen Survey (in German) proves time and again that leaders from the younger generation want to take on responsibility. And they have already proven this during the coronavirus pandemic: the initiative of the younger generation has made an important contribution to digitalising workplaces and collaborative working over the past year.

The disruptive power of digitalisation is still underestimated by many family businesses, as PwC studies show. Where does Baden-Württemberg stand in terms of digitalisation?

Mauden: The younger generation grew up with digital technologies, so dealing with them comes naturally. They anticipate transformational trends more readily and are prepared to take risks – because they can assess them better. This makes the next generation indispensable for digitalisation in Baden-Württemberg. But I think that our state, traditionally the state of innovators and inventors, has already made a leap forward as a result of the pandemic, and the lead held by large corporations is getting narrower. In product development and technology in particular, we have flagship projects in the region that are shaping entire industries. Examples include ZEISS and TRUMPF, which were awarded the 2020 German Future Prize for their advancements in extreme ultraviolet lithography.

You pledge that, while company succession will always have profound repercussions, it needn’t be a cause for consternation. How can you guarantee that?

Von Au: There is no single recipe for success when it comes to generational change. Every family business is unique – with its own opportunities and risks. However, some recommendations apply across the board. I recommend transferring the company to your successor during your lifetime, following a long-term plan. Departing entrepreneurs will need to make separate provisions for old age. I also consider the qualifications of the shareholders to be important – including those who will not be active in the business. All parties should engage in dialogue to determine the future strategic direction of the business, which should then be laid down in a family constitution. It is also important to define individual roles clearly, so that successors can step out of the shadow of their parents’ generation. However, joint management over a limited period of two to five years may be sensible in some cases.