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A family succession is different from all other exit options in so far as the emphasis is often not on maximising the owner’s exit price, but rather on ensuring that the business continues successfully under the ownership of the successor. Consequently, the tailoring (or grooming) is concentrated on the successor, rather than on the business. This alters the perspective of the business’s suitability for the exit option chosen and the notion of what purchasers are looking for. This will become clearer from what follows below.

Generally speaking, most types of businesses qualify for a family succession. However, if the successor is required to borrow money against the business’s assets to acquire the business, the business will need to be able to support the borrowings and the successor will need to have a professionally produced business plan demonstrating this ability.

As I have said, the emphasis in family successions is usually more on the suitability of the heir than the suitability of the business, so this question has to be changed to: ‘What are we looking for in the successor?’ This will influence the choice of successor and the way he or she should be groomed for the take over.

We will now look at the steps necessary for grooming (or tailoring) the heir for taking over the business.

Another major challenge of corporate entrepreneurs today is to explore, identify and recognize the opportunities available for developing new business enterprises. Large enterprises face such challenges more seriously than their counterparts, as the utilization of opportunities is crucial in the outcomes of entrepreneurship. Also, such organizations do have the problem of middle management crisis and confl ict between the young talent and the old experts. The middle management, particularly in large enterprises, is passing through a stage of transition. It does not see any space for contribution in decision-making or self development. Dissatisfaction of all kinds is clearly visible, leading to ineffective utilization of available talent for organizational effectiveness. Senior management can play an important role here in creating an environment supporting entrepreneurial initiatives and asserting their value for the organization.

In the structural approach, assets and liabilities of a company are modeled simultaneously. Thus, structural models are based on fundamental company data, focusing on its balance sheet and asset value. Default occurs when the value of the firm’s assets falls below its liabilities. Consequently, the required inputs comprise the firm’s liabilities, usually taken from its balance sheet, market value of equity and (implied) equity volatility. Since equities are typically more liquid than corporate bonds, one may argue that equity prices tend to reflect the value of a company’s assets more accurately.

Using information from the equity markets allows fixed income instruments to be priced independently, without requiring credit spread information from related fixed income instruments. However, if equity prices become irrationally inflated or deflated, as we have experienced during the equity hype of the late 1990s, they may be misleading indicators of actual asset values. Generally it is assumed that one can reasonably infer asset values from equity prices. An option pricing model is then used to derive the volatility of the firm’s assets. Although it is generally possible to model financial institutions in the structural framework they should be treated with caution, since it is difficult to assess their assets and liabilities.

Furthermore, since financial institutions are highly regulated, default may not occur even if the value of assets falls below the firm’s liabilities.

The traditional fundamental approach and structural models generally are based on the same set of balance sheet inputs. But while the fundamental approach used by most credit analysts requires thorough company and industry knowledge and is therefore rather costly and time-consuming, equity-based models are an efficient means to screen broad universes of credit issuers. However, structural models allow to incorporate credit analysts’ forecasts to take account of qualitative information that is not yet reflected in the balance sheet. Projections can be used to create more realistic estimates of the default threshold or to generate different scenarios with respect to future liabilities.