To facilitate transition from one generation to another in family-controlled firms is a more critical issue today than ever before. Many leading family-owned firms founded during the late 60s, 70s and 80s are headed up by relatively senior family members, and inter-generational transition will be happening in a larger scale over the next few years. But, how can such transition between the generations be done in an orderly way? Above all, how might one avoid making bad decisions at this critical juncture? How can proper preparation and training be achieved? And, how can an agenda of key questions for the incoming managers be set, allowing the older generations to provide inputs, advices and experience, without frustrating or procrastinating the transition? Let us therefore now first identify what seems to characterize many truly successful family firms, also during periods of top management transition. Let us then highlight a list of five critical issues that might serve as questions for the senior generations to be brought up, say, at family firm board meetings and/or at strategic retreats, when critical investment decisions are to be discussed. Such a set of agenda items – one might even say “check list” – could lessen the probability for dysfunctional conflicts between the generations at critical investment junctures, during such periods of generational transition. The senior management of a family firm, i.e. the older generation, has typically shown an ability to succeed within the business area(s) where the firm is involved, its existing businesses. But, business renewal is always called for, in order to ensure longer-term business success. There are always new technologies, changing customer preferences, emerging shifts when it comes to particular markets’ attractiveness, and so on. A balance between the more established part of the family business and new explorative business initiatives should thus be recommended. And here is where the next generation might be particularly effective, namely to take charge of such explorations, to make new business development happen. Many from the older generation might also become relatively more conservative over the years. This might impact the family business, i.e. relatively more “today for today”, more continuation of the status quo, in essence: more short-term focus! A need for rebalancing might be apparent, and should be part of this “changing of the Guard”. Let me first provide an example from my own family company, for then to present some conclusions and recommendations. Please keep in mind that I am approaching the issue of transition of a business from one generation to another strictly from a strategic point-of-view in the following, and am not taking legal, ownership and/or tax issues into account. I used to own a relatively large and indeed successful ship-owning company, S. Ugelstads Rederi. Even though a lot of progress was being made, and success enjoyed, there were at least three critical challenges, which eventually led to the sale of the company: * High financial leverage was key, to grow fast - a strategically important factor. This risk I was taking was offset by entering into long-term charters for the ships. * The value of the assets would fluctuate a lot, correlated with the ups and downs of the shipping market themselves. Thus “in/out” and “long/short” decisions would be driven by market timing. This was a key part of existing business success. * The technological platform was more-or-less constant. There was thus little “space” for the next generation to “explore” new business extensions. Accordingly, a decision was made to exit from the shipping business (when the timing of the market cycle was good), and instead focus more on developing a “new” business portfolio, balanced between relatively stable and relatively explorative new business. After the sale of the shipping company, we ended up investing in 5 areas of business activities: 1. Stocks/bond/currencies, 2. Real estate, 3. Minority positions in ships, 4. Ventures/Private Equity and 5. Education. All of these business areas had clear dimensions on “what is a good, traditional way to run the business” versus “what might be new, exploratory ways”. The effect from this restructuring was clear: There were ample opportunities for members of the next generation to become involved in specific investments, non-the-least to gain experience. The importance of this issue cannot be over-emphasized! The next generation would thus get exposure to experience this way, by focusing on a specific part of the family firm, initially, but without having to take it all over at once. This practical approach also ensured that the experience-base of the older generation might be drawn on for a longer period of time, as elaborated on later in this article. Now, let us examine perhaps the most significant issue for a successful transition of ownership to the next generation in family-owned firms: to ensure the maintenance of the firm, and to build its strategic vitality! Here is why and how: Traditionally, all businesses as noted, family-owned or not, tend to become more conservative over time. The owners are happy with the maintenance of status quo. Success within one’s core business might further contribute to this. So, why change? By inviting the next generation in, typically with “fresher eyes”, and by allowing the next generation to enter into some of the new business areas, through development or/and through acquisitions, one might open up for explorations of new businesses, so as to rebalance the traditional business with more exploration of new. The balance might then become more optimal, as a consequence of the inter-generational co-operation and transition. Thus, continuing business success would imply a good balance between “today for today” and “today for tomorrow”. Ownership transitions can thus open up for a balancing between continuation and exploration in the firm. And, consequently, harmony might be maintained between the generations. While the next generation might become increasingly involved, on exploration – related to newer business activities above all, the older generation might still also be involved, perhaps on more established continuation-related businesses. How, then, can the younger generation contribute with insights and experience when it comes to building new business through exploration? In my experience there are five fundamental issues that should be adhered by all – above all, by the younger and the older generation together, and to be discussed in every strategy retreat or board meeting, or, for that sake, whenever a new investment in an explorative business is being contemplated (this check list is meant both for families owning businesses as well as those setting up and running family offices): **1) Avoid over-investing, and especially not at early phases** As a background, I distinctly remember that when my shipping company was sold; the liquid proceeds, were "burning in my pocket". I felt that there was an urgent need to reinvest these funds. In retrospect, I probably put far too one-sided considerations into the potential upsides of most of these new investments, but with not enough considerations of what might go wrong. The urgency to reinvest resulted in a lack of realism on my side regarding the risks we were indeed taking, i.e. an unintentionally too high appetite for risk. From talking to others who have recently sold their firms, I often hear similar stories. There tended to be a hurry to reinvest, with a resulting lack of thoroughness in the analysis of the potential downside. So, what are the key learning points? * Avoid over-investing early on. Avoid going in too heavily! * Try to be realistic regarding the upside/downside balance. If in doubt, wait! There shall always be new opportunities coming. * There is no stigma in saying "no", or to invest a relatively smaller amount! (Too many relatively small investments may, however, lead to too much follow-up work, perhaps for a relatively small upside only!) **2) Be realistic regarding longer term financial need for new projects** When investing in new ventures, families often under-estimate the potential financial needs for further financing in these ventures. This financing need may often become a dilemma. If one choses not to invest in follow-up rounds, one will obviously face the prospect of becoming diluted in one´s ownership. Yet, if one invests more, one has perhaps invested too much. The dilemma to invest or not invest was often further accentuated by the fact that some of the other investors might have been unable (or unwilling) to participate in new rounds. In other words, one might be left with only two uncomfortable options regarding what to do - let the firm go bankrupt, or take the other investors share too. The learning might be two-fold: * To try to be more realistic at the outset regarding future potential financing needs in a given venture * To try to assess the financial solidity of the other investors in a given venture - would they be able to participate in follow-up rounds? **3) Do not invest in a fantasy, but in already established business** When considering investments in new ventures, we have found that it would often make sense to distinguish between those that were basically "a good idea, but with no actual revenues yet or a positive cash flow profile", versus actually established businesses, where there would be real sales, real customers, and an established positive cash-flow. We found that to invest early, but not too early, was key. Too early investments often tended to be too risky. To come into a venture a little later would typically be more realistic, even though some of the potential upsides might be lost. The key learning point is: * Products or services that are actually now being sold in the marketplace are essential. There is a big difference between this, versus wishful thinking about promised future sales, which have not yet been proven. (Prospectuses from start-up entrepreneurs often present their companies as being more established than they actually are!) **4) The key promoter must be solid, impeccable!** To assess the qualities of the key promoter of a given new venture seems key. What is his or her previous track record? Have they been successful before? Clearly, a strong sense of enthusiasm and belief in a venture is key. But, can this belief in business case, paradoxically perhaps, actually be too strong? Would there actually be a lack of realism here? Might there even be a risk that a promoter's convictions might be so strong that he/she might end up at the other side of what might be ethically acceptable? Might the promoter even run the risk of taking criminal actions as a result of his/her convictions? The learning here is key too: * Always assess the key promoter carefully regarding realism, as well as his/her ethical side. Is there a risk that he/she might become more focused on themselves rather than on the investors? **5) Can the family be actively involved in this business?** When entering into a new business, one should consider if it represents a true opportunity for your family to get involved in decision-making, if the business matches your values and strengths, if there is space for inter-generational cooperation. Within the area of asset management, we initially allocated considerable funds to be invested by various established banks. These would typically have their own in-house "products", however, with their own fee structures, declared as well as hidden, but invariably high. We were typically told, in the banks sales-pitches, that the risk might be expected to be low, relative to an expected steady positive return. These bank offerings were, however, typically relatively standard, and with little-to-no room for inputs from our side when it came to asset re-allocations, such as changing some of the stock or bond mixes in established funds. The financial results, regrettably, often tended to be rather disappointing, and some of my investments were lost. Key learning points: * Avoid funds managers (particularly banks) that are promoting their own in-house "products". * At a minimum, start with some active advisory portfolios with your banks and some discretionary. Use time to let your family learn and gain competence in asset management. For those families who wish to make asset management a core competency, gradually transition from discretionary to advisory mandates. * When the fund manager seems uninterested, or even unwilling, to enter into an ongoing, realistic dialogue regarding asset allocations, then consider this as a "warning light", and disengage from this given fund manager. These five areas should be well suited for discussions among generations, to avoid expensive mistakes. Equally important, these may also serve as a checklist, made known to all at an earlier stage, which might have the effect of “de-emotionalizing” specific business considerations later on. Rather than confrontation, a more balanced discussion might be had, which might both provide room for the experience of the older generation, as well as to allow the next generation room for its creativity. This interaction might be a “win-win”, i.e., lead to both better investment decisions and more harmony rather than confrontation, when it comes to the process of management transition.