Succession Planning: Design or Accident

The US census reports that as of 2007 there were just over 6M privately held businesses with paid employees.  Of those 2.2M (36%) businesses were owned by owner’s aged 55 and above.  Including the next age range bracket (45 to 55) you include another 2M business.  You therefore have upwards of 70% of all privately held businesses facing some degree of succession due to ownership turnover from immediate to long term.

A good number of these businesses will receive good advice  regarding planning either organization succession or a complete exit.  For those pursuing an organization succession this process may take at least 3 to 5 years to groom a successor, orchestrate a smooth transition and quiet exit of the owner/founder.

Selling
Many owners will exit completely by selling the company to another private owner, holding company or Public Company.  Hopefully the selling owner will enjoy an “Above-market Value” for their interest by investing in and implementing a value strategy.  The challenge in this scenario is beating the rush to the market to take advantage of a sellers market before the increasing numbers of selling companies creates a buyers market, which will reduce the opportunity to compete for a good price.

Retaining Ownership Interest
Others will choose to transfer control to another family member, loyal employee or recruiting an executive from the marketplace.  This strategy has two significant positives: owner/founder is still around, employees/customers are less likely to see a major change under new management.  On the flip side, the management dynamics will change from a closely held style without much accountability of the senior operating manager to anyone but himself to a closely held style with the senior operating manager accountable to the original owner and / or family board.

Many of these owners recognize the closely held style in which they operate and are aware of the difficulties and challenges that face whoever replaces them running the company with appropriate freedom to manage the business without micro-management from the now “retired” owner.

Options to Consider for Succession Success
Whether the succeeding CEO is a family member, trusted employee or executive recruit the owner would be wise to consider the following practices that will increase the probability of a successful succession.

  1. CEO Fit
    1. Understand the personality profile needed to work with the owner and what characteristics the owner needs to control in order to have a harmonious relationship.
    2. Have the candidate tested and evaluated to objectively determine if this person has the aptitude and temperament for the job.
    3. Internal candidates: Assign them project/responsibility where you can evaluate their ability to make decisions and are held accountable for the outcome.
    4. Internal candidates: Test their leadership and their ability to motivate the organization to achieve above average results.
  2. Transparency
    1. A major obstacle in any succession for the owner is to determine if things are still going OK.  This is particularly an issue with those owners who operate on gut instinct with a hands-on-the-wheel management style.
    2. Identify those areas in the business that you consider fundamental to the success of the business and develop feedback processes and metrics that can be reported to you and the succeeding CEO.
    3. Formalize your decision making process so that there is some predictability to how the organization processes information and arrives at business strategy, new product/market decisions, and organization changes.
    4. This provides a baseline and foundation for communication with the new CEO.
  3. Advisor(s)
    1. Select an advisor that knows you and your company well and can serve as a sounding board for you and when necessary moderate conflict resolution between you and the new CEO as the new CEO expands their impact and effects change in the organization.
    2. Encourage the new CEO to use one or more advisors to strengthen areas in their expertise that are important in the new role.

Force Fit
Beware of burning out the first candidate who will find themselves bumping up against obstacles because they are the first to blaze a trail in the company working under the owner.  Should that person burnout or drop out the next person to come into the position will find an easier road because they will benefit from the “learning” of the owner on what it takes to work with a new CEO.  While you may be successful with the second try this scenario can be costly to the business.

It is not unlike raising your first child and the conflict that surfaces as boundaries are stretched at every turn.  The second child comes along and breezes through with little to no conflict because, as a parent, you have been there before, can anticipate circumstances and manage expectations so that conflict is avoided.

Summary
Successfully transitioning an owner to the second chair is not a slam-dunk.  It takes planning, patience, hard work, transparency, humbleness, persistence and endurance – on both sides. A successful outcome however will prepare the business for growth and long-term success.  Put egos on the back burner and focus on what is good for the business.

Execute an owner succession by design and not by accident.

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