SUCCESSION PLANNING
Five Criteria for Maintaining Ownership

BY MIKE COHN

ARTICLE REPRINT This article is adapted from one that appeared in our newsletter, TRANSITIONS & traditions 1999 Take a quick quiz on Transitions

1. Patient capital - having a long-term view: Family businesses will increasingly need more equity to grow and compete with larger firms, and family members have historically been a primary resource. In the future, they may exact a higher "price" for their patient money, and next generation owners will need to better understand their company's goals, the strategies for realizing those goals, a reasonable expectation that the goals will be realized, and confidence in the management team.

When the goals are not realized or confidence in the management team is eroded, there had better be a plan to address the lack of marketability for these family members' shares. Family members willing to keep their equity "at risk" in the family business will need to understand they often are committing to a time horizon that may be undefined.

2. Willingness to manage risk: Family members often are naive in their understanding of risks associated with the family business, and their perspective may be flawed when viewing the business in the historical context of parents' and grandparents' successes. Parents who shield their children from business risks also leave them psychologically unprepared to accept the responsibility (and risk) of change. Without understanding the necessity (and risk) of change, shareholders may have unrealistic expectations of management. Both too little risk and too much risk threaten the future of the business.

3. Realistic view of external forces: Understanding the context in which the family business operates is a critical component for ownership--not just the local context, but the industry and world context as well. Research by the next generation with action plans to address important issues can create opportunities for trying new ideas in the business.  This can lead to organizational change, and business decisions about new products and processes can be tried -- leading to confidence in the next generation's ability.

4. Skilled management of internal resources: Whether training and promoting from within or hiring from outside, human resource issues will continue to grow in importance as greater expectations are placed on everyone involved in the family business.  With greater expectations comes risk-sharing which leads to compensation based increasingly on performance and responsibility. The family CEO of the future will need to be grounded in the company's products and processes (probably with experience in sales) to gain employees' respect, understand financial issues, and manage the company's assets strategically.

5. Balanced tension between family culture and bottom-line results: Every successful family business has a rich heritage, which is an important aspect of its success.  However, in some companies, too much respect for tradition and the "way Dad (or Mom) did things" can threaten the business's future -- especially when there are sacred cows that appear untouchable.

Simultaneously, ignoring one's history, changing direction or changing processes without the benefit of wisdom, can just as easily sink a company. Balancing respect for the business culture while positioning the company for the future is no small feat, especially if profit margins are shrinking, competition is increasing, and corporate expenses and overhead need to be trimmed.