1. Succession Planning and Generational Transfers

One of the most defining—and perilous—challenges for family businesses is the transfer of leadership and ownership to the next generation. Studies reveal that only 16% of European family businesses have a formal succession plan, and even fewer (25%) with CEOs over 65 are prepared for this transition13. The absence of clear succession strategies often leads to internal conflicts, operational disruptions, or forced sales. For example, Central and Eastern Europe, where many businesses are first-generation, face heightened risks due to limited institutional knowledge about multi-generational transfers1.

The fiscal and administrative environment further complicates transfers. While some EU member states offer tax reliefs for business transfers, disparities in exemptions and reporting requirements create uncertainty. A 2014 tax monitor by EFB and KPMG highlighted cases where unprepared families faced crippling tax obligations, jeopardizing business continuity.

How to Avoid This Pitfall:

• Start Early: Initiate succession planning at least a decade before the anticipated transition. This allows time for mentoring successors and aligning family and business goals.
• Leverage One-Stop-Shops: Utilize EU-supported platforms that consolidate legal, financial, and logistical resources for business transfers.
• Formalize Governance: Implement family councils or shareholder agreements to codify roles, responsibilities, and decision-making processes.

2. Informal Governance Structures

European family businesses often prioritize agility over formality, but this can lead to governance gaps. Only 59% of European family firms have a board of directors, compared to higher rates globally. Without formal oversight, businesses risk conflating family dynamics with corporate strategy, leading to conflicts over resource allocation, compensation, or strategic direction. For instance, disagreements between siblings or cousins in third-generation businesses frequently escalate due to ambiguous governance frameworks.

How to Avoid This Pitfall:

• Establish a Board of Directors: Introduce independent directors to provide objective oversight and mediate family disputes.
• Separate Family and Business Roles: Clearly define whether family members participate as owners, managers, or both, and enforce performance-based criteria for leadership roles.
• Adopt a Family Charter: Develop a written agreement outlining values, entry requirements for family members, and protocols for resolving conflicts.

3. Debt Bias and Financial Fragility

Many European tax systems incentivize debt financing over equity by allowing interest deductions while taxing retained earnings. This “debt bias” has led to over-leveraged balance sheets, making businesses vulnerable to economic downturns. A 2019 KPMG survey found that 49% of family businesses rely on retained profits for financing, while only 8% access capital markets—a reflection of both risk aversion and concerns about losing control.

How to Avoid This Pitfall:

• Advocate for Tax Reforms: Support EU initiatives to equalize the treatment of debt and equity, such as the proposed Debt Equity Bias Reduction Allowance (DEBRA).
• Diversify Financing: Explore hybrid instruments like mezzanine financing or strategic alliances with industrial partners to reduce reliance on bank debt.
• Reinvest Profits Strategically: Allocate retained earnings to innovation or digital transformation projects to enhance long-term resilience.

4. Regulatory and Political Uncertainty

Brexit, trade wars, and shifting tax transparency rules have amplified regulatory anxieties. In 2019, 60% of family businesses cited regulatory changes as a top concern, with UK firms particularly wary of Brexit’s impact on supply chains and currency stability. Additionally, proposed EU audit reforms and sustainability reporting requirements could strain smaller family firms lacking compliance infrastructure.

How to Avoid This Pitfall:

• Engage in Policy Dialogue: Collaborate with industry groups like European Family Businesses (EFB) to voice concerns and shape favorable regulations.
• Invest in Compliance Technology: Adopt cloud-based ERP systems to streamline reporting and adapt to new standards efficiently.
• Scenario Planning: Regularly assess geopolitical risks and develop contingency plans for tariffs, supply chain disruptions, or currency fluctuations.

5. Talent Shortages and Innovation Gaps

Despite their economic clout, family businesses struggle to attract top talent, with 63% of European firms citing the “war for talent” as a critical issue. High-growth companies, in particular, face pressure to compete with tech startups and multinationals offering dynamic work environments. Simultaneously, many family firms lag in adopting digital tools, fearing disruption to traditional operations.

How to Avoid This Pitfall:

• Modernize Employer Branding: Highlight long-term stability, legacy, and community impact to appeal to purpose-driven professionals.
• Upskill Existing Teams: Partner with vocational schools or universities to create apprenticeship programs tailored to industry needs.
• Embrace Open Innovation: Launch corporate venture arms to invest in startups or collaborate on R&D projects, fostering a culture of experimentation.

Conclusion

Family businesses are not merely economic entities but custodians of heritage and community trust. By addressing these five pitfalls—through proactive governance, financial diversification, and strategic innovation—they can secure their legacy for future generations. Policymakers, too, must recognize their unique role by streamlining tax regimes and fostering ecosystems that support intergenerational entrepreneurship. As Europe navigates demographic shifts and digital transformation, family businesses that balance tradition with adaptability will remain indispensable pillars of the economy.

“The greatest threat to a family business isn’t competition—it’s complacency. Success requires the same reinvention across generations that built the company in the first place."