Succession: Passing On the Business

Why succession is the biggest challenge for family firms, how families use family constitutions and trusts, and research on whether heirs or outsiders perform better.

Succession is often the hardest moment for a family business.

The challenge

Only a minority of family businesses survive to the third generation, according to commonly cited studies.
Conflicts arise over control, roles and wealth.

Tools

Family constitutions: written rules for family involvement, dividends and disputes.
Family councils.
Trusts holding shares to avoid fragmentation.
Wills and clear shareholding plans.

Heirs vs professionals

Economist Francisco Pérez-González found that US firms appointing family heirs as CEOs saw weaker performance on average than those hiring outsiders, especially when heirs didn’t attend selective colleges.
Other research finds family continuity can help long-term investment.

Indian examples

Godrej family agreed in 2024 to split the group between branches, planned amicably.
Bajaj and Mahindra have mixed family and professional leadership.

Primogeniture

Traditional preference for eldest sons is giving way to more merit-based choices, including daughters.

The family constitution

A family group writes a constitution: family members must work elsewhere for five years before joining, and disputes go to an elders' council.

Thinking family heirs always make the best leaders

Research finds mixed results; outsiders sometimes perform better.

Key takeaways

Few family businesses survive to the third generation.
Constitutions, councils and trusts help.
Research finds heirs as CEOs often underperform outsiders.
The Godrej family split its group amicably in 2024.