Family Succession Planning: What Happens When Parents Won't Let Go

By Sabrina Parsons, CEO, Palo Alto Software, Eugene, Ore.
My parents made me the CEO of our family business, Palo Alto Software, on the eve of the financial crisis. They remained majority owners but decided to step down from day-to-day decision-making, leaving me to fill that role. When I took over in 2007, I began preparing to go forward with a big new growth initiative.

Then the recession hit. My parents had barely survived the dot-com collapse in 2000, mostly because they hadn't laid off staff quickly enough when their profits dropped. They immediately pressured me to start letting people go.

I hesitated. Palo Alto was the largest company I'd ever run, and my inheritance and our family's legacy were tied to its survival. But I knew all of the employees and their families personally; laying anyone off would have a devastating impact on them. Even though my parents were pressuring me and the bills were piling up, I refused to lay anyone off. I knew there had to be a better option.

Struggling with succession
I think family succession plans tend to fail when the parents say they want to pass on the business but aren't prepared to step out of the way. The day my parents made me CEO, they told me that they had worked hard and were financially secure, and that the company was mine to run successfully or ruin. I took this to mean that they were open to letting me run it on my own terms. My decision to retain our full staff was the first test of that promise.

We sell business plan software both directly and through big-box retailers. Our retail business took a huge hit in the fall of 2008. Consumers were paralyzed. Circuit City, one of our main retailers, completely failed. Our direct business was still turning a profit, but we were worried that it might go next.

My parents thought that the company could spiral out of control if we didn't cut back our payroll costs, and in our weekly meetings pushed harder for layoffs. I was tempted to tell them, "I'm the boss, and I'm not doing it." But I knew such an ultimatum could create a painful rift between us. Instead, I set a target budget and then promised that I would initiate layoffs if I couldn't meet it. Making the decision about the numbers diffused the tension. But it meant that I had to come up with a solution -- fast.

Living by the numbers
I began by revamping our business plan to protect us in a worst-case scenario, such as our direct business taking a huge hit. We took a good look at our infrastructure expenses, like Internet bandwidth and server costs -- since we're a software company, we spend tens of thousands each month on our IT services. My husband Noah, our COO, had noticed that several service providers were offering recession specials. So he negotiated deals with new vendors that saved us $15,000 a month.

This move gave us a cushion that allowed us to meet our budget that month. But we didn't rest comfortably. We rechecked the numbers every month before deciding whether to lay people off, and every month we managed to come in under budget with room to spare.

We grew seven percent in this fiscal year, and predict growth of fifteen percent for 2011 as a result of the strategies that Noah and I came up with to survive the recession. And we've made four new hires.

I'm grateful my parents made good on their promise to let me run the company. Of course, now that I've had some success I suspect it's a lot easier for them to say, "Okay, Sabrina. You're the boss."

Sabrina Parsons, a mother of three, writes a blog called MommyCEO about how she balances her work and home life.
-- As told to Kathryn Hawkins

Resources:

• If you're passing on a family business, learn how to make succession go smoothly.
• Learn about what keeps some family businesses successful, generation after generation.