Succession planning: Beating the odds

Vanessa Macdonald looks at why Malta's family businesses struggle to survive the handover. Succession isn't a box-tick—it's a high-stakes transition shaped by timing, governance, valuation and family dynamics. Plan early, talk honestly, and protect the legacy.

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For decades, Malta's economy has been driven by its SMEs, but there is another aspect: how many of them are family-owned? There are very few statistics, but the accepted percentage seems to hover around 75%. That means an impressive 45,000 companies are family-owned.

These may range from small shops to small businesses, but some accumulate enough wealth and goodwill to merit passing on to the next generation.

And this is where it gets tricky. The owner may have children who are not interested in taking over the company. The children may not be the best qualified to take on the responsibility or role. The company's founder may face numerous decisions – not all of which are optimal or successful. The owner may opt to sell the company to an individual or company outside the family, so the issue then becomes disposal rather than succession.  Probably the most common circumstance is that the owner and the family have put off even considering how to address the eventual succession of the business, leaving a stressful, likely complicated situation when it inevitably occurs.

The issue, thorny as it may be, obviously requires planning.

Most international surveys report that under a third of family-owned businesses survive into the second generation. The news gets worse with each generation: only 12% survive into the third, and only about 3% into the next generation and beyond. Sobering numbers!

Statistics for Malta are indicative, even though the available figures are slightly outdated: a 2018 survey by the Malta Chamber of Commerce, Enterprise and Industry found that an estimated 16.9% of family businesses were inherited. And although 82.9% of family business members would prefer to pass the company to the next generation, around 8% would prefer to sell it to an outsider.

The major, large family-owned companies in Malta are now entering their second century, and they have chosen different paths. Indeed, KPMG Malta reported in 2023 that several business families were at a crucial phase in their succession planning, with a high volume of wealth being transferred between the second and third generations.

Bear in mind that the obstacles to a successful transition are tremendous: there is no 'one size fits all' formula, but the key principle seems to be timing: the earlier a company starts planning, the better.

The issue of succession is by no means a Maltese one. The Malta Stock Exchange Institute was the lead of a six-country project team that successfully bid to create an Erasmus programme to identify ways to address this. NextSME already has its own website, www.nextgensmes.eu, that offers free online training covering six aspects of succession planning for family-run businesses. The project is in the hands of Cliff Pace, who explained that it forms part of the MSE's financial literacy programme, tackling an aspect of business often overlooked.

"This will become even more important going forward as there is a large number of entrepreneurs who created their companies during periods of economic expansion, and who are now approaching retirement.

"The project highlighted that in Germany, for example, 30% of SME owners are aged 60 or more, while in France one in ten SME leaders is 65 or older," he said.

Thomas Cremona

One particular aspect of Malta is the dearth of merger and acquisition opportunities, which makes succession planning harder and disposal much less likely. Thomas Cremona, the founder of idisav, explained that in an ideal acquisition scenario, a buyer would target a company with minimal dependence on its owner.

"However, many Maltese businesses remain heavily owner-dependent because founders either continue to run the enterprise long after they could have afforded professional managers, or the business was not profitable enough to sustain a professional management structure. This dependence creates a material risk for acquirers, who are often unwilling to take it on without applying a substantial discount to the asking price," he explained.

Pricing continues to pose a significant challenge: in addition to the structural constraints of the local market, many owners expect the sale of their business to fully finance their retirement. Yet most Maltese enterprises do not justify such elevated valuations.

"In practice, many exits will provide owners with time and liquidity to consider their next financial steps, rather than fully funding retirement plans," he added.

The lack of liquidity on the Malta Stock Exchange limits the practicality of public market exits for Malta's larger corporate groups, he said.

"A sale through the exchange is generally either too gradual to be meaningful or too costly to justify. Furthermore, Malta lacks an active private equity ecosystem. The pool of potential acquirers is therefore concentrated among synergistic buyers such as competitors, high net worth individuals or groups of them, and the established Maltese corporate groups that continue to expand across local industries."

David Pace

One entity with international experience in this topic is KPMG, and its senior partner for KPMG Malta, David Pace, stressed the importance of good planning.

"It has been shown (and we have had the opportunity to witness directly) that should family businesses plan the transition of Management, Income, Control, and Equity (MICE) effectively, in due time, the next generation has less to fear and more to look forward to.

"MICE encapsulates what matters most to family members in connection with their family business. Yet often they are shrouded under a veil of silence and/or are not given their dedicated focus, with succession seen to merely relate to the passing over of the shareholding interest.

"When families have engaged in proper succession planning, discussing these matters, capturing principles, sharing these and creating the forums to keep the discussion ongoing, then as family members go through their life stages (kids coming of age, marriages, next gen's being born, retiring of older gen, etc) you can see how this helps produce healthy, timely, discussions.

"By way of example we have witnessed cases where the parents wish to have family members take over the business but none of the family members appear keen to in their eyes... to then discover – when we engage in succession discussions with the children – that one or more of these family members would have been interested to get involved in the business but this topic was never discussed, leading them to believe that their parents didn't wish them involved... And then the parents tell us they never discussed it with the kids, as they didn't want to impose!"

"Invest time and resources to work through these matters: the tax bill at the most is often 5% in Malta, but getting the succession plan wrong (like tying two siblings in a business they should never be co-owners of) could lead to seeing the 95% go up in legal battles and other dysfunctional behaviour – not to mention loss of the family bonds too!"

Another important consideration is that succession planning is sometimes viewed as a one-time event, revisited only when it's time to transfer the business again. Indeed, just as family members go through life stages, the company too has its own lifecycle, so what worked 10 years ago might need to evolve alongside changing contextual realities and as new challenges and opportunities present themselves.

He also stressed the importance of communication: "Simply put, the best succession plan is one that works for the next generation as much as it works for the present owners. Anyone who has tried to tackle a sensitive matter with someone close, with whom other pressures exist, is at risk of this new matter being confounded with the overarching tensions.

"Similarly, in family business, three distinct systems play out: the family system, the business system, and the ownership/shareholder system. You need to deliberately create dedicated spaces to allow topics to be discussed in their own right."

There is no doubt that ensuring a smooth succession is a challenge. Founders have worked hard to build a company, and it is often not just a source of income but also their legacy. But this is precisely why a founder should invest to ensure that what they have built can continue for generations to come.

1. Keep in mind the impact on employees

The issue of succession affects those who already work for the company. Even if a family successor has been on the cards for some time, it does not always follow that employees welcome the change. They may embrace the new head as representing the family's continuing belief in the company – or they may resent the new appointee, especially if they have not worked their way up the ranks or proved themselves. Bear in mind that no matter who is appointed, someone will feel overlooked or have their career path blocked.

This makes it all the more critical for the appointee to have a deep understanding of the company and its values, which is often best achieved by working at different levels and across various sectors. It is also essential to ensure communication, not just with senior levels but with the entire hierarchy. A leader is only as strong as those who follow them.

2. Avoiding discrimination and bias

Ensure the succession plan does not contain any hidden biases that could affect the selection of the best possible successor. The days of everything going to the eldest son may be long gone – but there are still cultural assumptions that need to be managed.

For example, a German study from 2015 found that when both a son and a daughter were available, the daughter was chosen in only 19% of the surveyed companies. When looking for a successor, the family should focus on qualifications and leadership qualities, not gender.

3. Keep an open mind

The head of a company should not assume that a family member will take over their role. Their offspring may have different careers in mind, and even those ready to take over from their parents may have different timing in mind, depending on their own life journey.

This may mean that the leader has to reconsider when they want to take a step back, for example, either doing so earlier or later, neither of which may be optimal. And although some period of handover would be recommended, the head needs to be ready to take a complete step backwards.

The family dynamics are also essential to keep in mind: if one sibling is chosen, what about the others? What are their expectations? It is not only a matter of giving each a fair share of the accumulated wealth: they may also want a role within the company.

Again, communication is key…

4. Succession is not just about leadership

Bear in mind that there are various legal and fiscal considerations. Apart from transferring ownership of the company, review the shareholder agreement and voting rights to avoid disputes further down the line.

There are also governance issues, especially when the company or group has a board of directors. This may require administrative changes – or even more substantial ones.

5. Manage complex structures

As more generations become involved, a company or group's structure becomes more complex, and the risk of conflict increases. There are various ways to ensure that all family members are kept up to date and empowered to participate in future decisions.  

Consider setting up a family charter that clearly outlines the future and each person's place in the setup, while establishing a clear mandate for any existing or future board of directors. The charter would outline the roles and expectations of both family and non-family members, and establish mechanisms for resolving conflicts.

This can be complemented by a family council, where each involved family member has a say in the issues affecting the company. Think of the council as a board of directors, but rather than focusing on strategy and operations, it prioritises family values and dynamics.

6. Embrace the emotional side!

It is not all about laws and technical details. Deciding when to step down and appointing a successor is, first and foremost, an emotional transition. This may negatively affect how you handle issues, whether we are talking about taking rational decisions or succumbing to peer pressure and family expectations.

CASE STUDY 1

M. Demajo Group

JJ Miceli Demajo, CEO, 4th generation

Founded in 1910 by Michel Demajo, the M. Demajo Group has evolved across four generations of family ownership and leadership.

JJ Miceli Demajo

In recent years, succession has become more deliberate and structured. Planning begins early, with potential successors exposed to several group businesses and mentored by seasoned executives. At the shareholder level, a family council acts as a liaison and advisory body, ensuring the family's interests remain aligned with those of the business. This sits alongside formal board committees such as finance, nominations, and audit.

Our approach is always focused towards merit-based and gender-neutral. We anchor leadership selection to role requirements, performance and values, and we pair transitions with clear communication and onboarding plans so that everyone involved understands the rationale and feels part of the journey. Our ongoing Group HR strategy work supports this.

On portfolio stewardship, we prioritise long-term resilience: we invest in growth areas and review non-core activities with discipline. Over the years, we have exited or consolidated selected lines when strategic fit or risk profile warranted it.

What has helped us endure? A few principles: start succession planning well before you need it; separate family governance from business governance while keeping them in dialogue; insist on merit; communicate early and often; stay diversified but focused; and, above all, our most important element is our values. We cascade our values of care, reputation, trust, and family throughout everything we do. These practices have allowed the Group to adapt through Malta's economic transformations while maintaining continuity of purpose and performance.

CASE STUDY 2

Vassallo Group

Pio Vassallo, CEO, 3rd generation

The Vassallo family business traces its origins to 1946, when our late grandfather, Piju Vassallo, then a farmer, recognised an opportunity in the aftermath of the Second World War. With only a truck, initially used for farming, as his single asset, he began clearing war debris, marking the start of the family's entrepreneurial journey.

Pio Vassallo

As Piju's five sons matured, they joined the business and, in 1971, officially registered the company as Vassallo Builders Company (registration number C2448). At this pivotal moment, our father Nazzareno, one of Piju's five sons, was appointed managing director while his older brother became chairman. During the late 1970s, two brothers exited the business, selling their shares to the remaining four shareholders.

In 1985, after Piju Vassallo's retirement, the remaining three shareholders decided to pursue separate business paths. Our father purchased the shares of the original company, Vassallo Builders Limited, while other business interests were divided among the two remaining uncles as part of the agreement. With this transition, my dad and mum became the sole shareholders of what would become the Vassallo Group, which is set to celebrate 80 years since its founding.

Dad made it clear from early on that all five siblings would join the business as equal shareholders upon turning 18. This clarity in succession planning, regardless of gender, laid a strong foundation for the family's continued involvement. Currently, the business is owned by seven equal shareholders. In addition, our parents required that each child attain a university education before joining the family enterprise.

While the essential principles of a family business constitution were discussed and understood, a formal document has yet to be executed. The next step is to draft a constitution to safeguard the business for future generations, a process requiring trust, transparency, and expert guidance. To support this effort, the family has joined the Global Family Business Network, an organisation of 5,000 business families, and we are collaborating with a seasoned family business expert to guide the drafting of our constitution and other succession measures.

One key element under consideration is that future generations must complete a university degree and gain external work experience before becoming eligible to join the family business. The aim is to ensure that competence aligns with the business's requirements.

Reflecting on our journey, we acknowledge that succession planning may have started later than it should have for the next generation. The advice for other family businesses is to initiate these discussions early, recognising that succession is a gradual process rather than a single event. Keeping top executives informed throughout helps prevent unnecessary or false speculation. It is also vital to communicate the business's values and purpose to heirs at an age when they are old enough to understand.

Although exit strategies for our heirs have not yet been discussed, it may be beneficial to consider them so that no one feels trapped in the future. Good governance is essential, and a crucial aspect is the inclusion of both non-executive and non-family members on the board. This practice, insisted upon by dad, has been carried forward by the next generation since he retired four years ago, strengthening the company's leadership and long-term prospects.

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