BY MIKE COHN

Over the last few months I have conducted several workshops for trade and academic groups such as retail nurserymen (GrowerTalks), the National Association of Metal Finishers, the National Electrical Contractors Association, the University of Texas at El Paso and Goshen College in Indiana.

At the end of each workshop, I ask participants to share what they intend to do with the information they have acquired about ownership succession and estate planning. From the responses of some 300 attendees over the last quarter, I have extracted the following Seven Rules of Ownership Succession:

1. I will train and empower my successors. Succession planning should begin during the owner's lifetime. A death-driven plan is a failed succession plan. The owner should initiate the process by open communication with potential successors and heirs. It requires a commitment on the part of the current owner to share information, responsibility, and power. Successors must also be committed – to explore their own vision and passion for the family business.

2. I will step aside by age 70. There is no magic number; 65 or 60 works just as well. What is magic is a verbal commitment to all family business stakeholders that something will change at a particular point in time. Such a pronouncement creates pressure on everyone to work towards a joint goal, to meet specific performance standards and accountabilities by the chosen date.

3. I will provide a mentoring program. A mentor is often a nonfamily, loyal key executive who can coach and support the next generation. During rough periods that always occur in a transition program, the mentor should provide guidance, enable the successor to check the accuracy of his or her perception about what's going on, and monitor the successor's progress as the plan proceeds. Other important functions: helping the successor identify his or her areas of strength; and explaining different particpants' perceptions of reality.

The coach can make or break implementation of a succession plan.

4. I will provide financial opportunities for inactive family members. One of the key concerns often lurking beneath the surface of family business conflict is inactive family members' belief that they should participate in the business. Inactive family members often have different skills, mature in different ways and may not be suited for the business.

Owners can provide financial opportunities outside the business for those inactives. A family bank can provide entrepreneurial venture capital; loans with outside assets (or guarantees on loans) can help resolve the issue of fair-versus-equal treatment of inactives.

5. I will become financially independent of my business. If the current owner is not financially independent of the business by the time she or he is finally ready to step aside, the owner may have to sell the business or somehow turn the illiquid family business into a retirement-income stream that will protect his or her standard of living. A threat to that standard of living might make the exiting owner reluctant to let go.

The sooner one begins to address financial security, the easier it is to create assets outside the business and to diversify net worth. Too often the family business and related real estate represent 95 percent of an owner's net worth. At the time the owner wants to withdraw, tapping unfunded pension dollars may conflict with an allocation of already existing strategic and limited resources.

6. I will teach my children stewardship and prepare them to become inheritors. Often there is little discussion in well-off families about money and how it will be managed by future generations. Trust documents can be important to minimize taxes. But trusts may result in poorly prepared inheritors, who become frustrated at their parents' apparent lack of faith in the children's judgement and maturity. By teaching children stewardship early, the family can communicate values about how money can and should be handled. The family should also communicate expectations about wealth transfer.

7. I will work to reduce my estate taxes. Many families avoid confronting estate planning issues, and then they are forced to sell out to cover estate taxes.

Some buy life insurance on the business owner to cover future estate taxes. They may not have to sell, but will likely miss out on opportunities to use the capital to invest in the business.

Fewer still take advantage of planning opportunities to reduce transfer taxes. These families often find that the planning process puts other succession issues in focus, such as control, change of ownership, inheritance and readiness of the next generation. Dealing with these issues can help keep the business in the family.

These rules of ownership are a good place to start for family businesses beginning succession planning. Which of these rules are you willing to commit to? Which seem unreasonable or unrealistic, and why? We invite you to fax us your responses (602-468-9704) along with other rules of your own.