Guido Corbetta and Alessandro Minichilli

Family Capital - October 10, 2016

Family businesses come in all shapes and sizes. Not only that, many of them believe they are unique and should follow their own instincts when it comes to important things like passing the business on to the next generation. But two prominent academics disagree and argue that no matter how unique a family business is there are seven universal conditions for good succession - and these conditions are inevitably followed by businesses where succession has gone the most smoothly.

So, here they are - the seven universal conditions for good succession put forward by Professors Guido Corbetta and Alessandro Minichilli of Bocconi University in Milan:

1. A clear line between the family and the business

Families who see the company as a distinct entity, independent from the family itself are more likely to prioritise the continuity of the business. And this is one of the conditions for good succession, argue the authors.

2. Implement a modern governance structure

Family businesses that implement a modern and well-functioning governance structure, characterised by a clearly defined accountability chain, proper legal structures, and a professional board of directors, are more likely to succeed with generational change than companies that don’t have these structures in place.

3. Value competence before familiarity

The importance of meritocracy in a family business is central to good succession. As the authors say: “The continuity of a family business is only possible when a generational transition prioritises competence over personal bonds—in other words, when the culture of meritocracy is upheld.”

4. Quickly and clearly define the rules of change

There is a need to define a clear set of conditions rules and obligations in the family business, particularly when facing the process of generational change.

5. Prepare for the unexpected: capital

This point is related to the availability of capital to enable generational changes. The authors talk about the “three golden rules” within this category, which are capital been set aside to deal with unexpected events, procedures for withdrawal of shareholders, and the availability of assets to reduce the effect of tax burdens resulting from a generational transition.

6. Setting objectives and processes

A successful generational transition often lies with the approach chosen to deal with it, and a “process” perspective is preferred to a “goal-oriented” one, say the authors. A goal-oriented approach is often problematic when unexpected events take place, given that no contingency plan for such circumstances exists. In contrast, a process perspective is characterised by the continuous updating of plans and actions, taking into account new information that becomes available.

7. Involve third parties

The authors argue that where companies have successfully managed one or more generational transitions they nearly always have third parties helping with overcoming difficulties. These third parties can provide knowledge and expertise that might not be found inside the family and can limit the role of emotions, and emphasise the importance of technical and economic issues.

The authors also looked at the factors that contribute to the failure of generational transitions. These were in many ways just a reversal of the seven factors stated above, and involve disharmony within the family, intergenerational friction, treating succession as an event, rather than a process, and involving the wrong third party in the process. 

Attached: The guide to generational transitions