Succession Planning 101

Succession planning basics for today’s businesses.

By Bridget McCrea

Scott Peacock vividly remembers a time when his days were spent sitting at an injection-molding machine all day, with the message “Don’t think you’re going to get a cushy job just because you’re a family member” echoing through his mind. Though somewhat harsh, the words – spoken by Peacock’s grandfather – kept the younger family members on their toes, knowing that they’d have to prove their value at Peachtree City, Ga.-based M.A. Industries Inc. before any job advancement opportunities would come their way.

“My brother and I started at the bottom,” says Peacock, national sales manager for the 150-employee firm, which produces precision engineered products like manhole steps and tooling, pulling irons, concrete test cylinder molds and manhole lift systems. “We had to earn it.”

For Peacock, that meant working in all aspects of M.A. Industries’ operations, from production to shipping. “I know the workings of the company from the inside out,” says Peacock, whose father oversees production and brother handles purchasing. Peacock’s grandfather owns the company and continues to play a role in its daily operations while cultivating the next generation of ownership.

According to Peacock, it’s all part of the firm’s succession plan. While not written down or recorded anywhere, the “plan” is recognized and followed by family members as well as non-family members who hold leadership positions within the firm. “When my grandfather passes the reigns, he will have a team in place that knows how the company should be run,” says Peacock.

But even the best of plans can’t predict oncoming crises, such as the illnesses that, for the Peacocks, led to the untimely passing of two family members after some time battling cancer. Yet another family member is currently in remission for the illness, says Peacock.

“That took some careful planning,” says Peacock. “You don’t want the person to feel that they are being replaced because of the illness, but at the same time you have to look after the business in the event they do not return. Personal feelings are hard to deal with in some situations.”

To ensure that both the day-to-day and more difficult situations are handled with care, Peacock says honesty is the best policy. “If you’re the owner, always be up front with your plans, because you never know what tomorrow might bring,” Peacock advises. “Always have someone you are training to do your job, and never keep what you are doing a secret.”

Planning ahead
That “handing down of the reigns” that Peacock is referring to is known in the business world as succession planning. At its simplest, this type of planning basically ensures that individuals are identified and prepared to replace key players as their terms expire, for whatever reason. When done right, succession planning helps to guarantee the continuity of skills, leadership, knowledge and vision within the organization – at both the leadership and the employee level.

Critical for both family-owned and non-family-owned firms, succession planning involves understanding the organization’s long-term goals and objectives, identifying the workforce’s developmental needs (such as training), and figuring out longer-term workforce trends and predictions. Companies that take this three-pronged approach to succession planning wind up with employees who are ready for new leadership roles as the need arises.

The problem is that most companies tend to ignore succession planning, and instead use a “seat of the pants” approach to preparing for the future. “If succession planning for small and mid-sized businesses were graded like a class in school, the grade would be a C-minus or D-plus,” says John Couzens, managing partner of Denver-based consulting and advisory firm Trinity Capital Services LLC.

“Business owners have great difficulty in getting clarity on what they want for the business in ownership transition,” Couzens says, “and clearing this ‘fog’ is challenging because the relationships between and among the owners are so personal and multifaceted.”

Those firms that do partake in succession planning find the payoffs significant, says Couzens, who adds that such plans are critical for a number of reasons. For starters, business owners who don’t plan for the future wind up reacting to circumstances.

“That generally leads to less favorable outcomes and often means that, in the process, they lose the very control that was so important (especially true in family-held businesses),” says Couzens. “Business owners who do plan for the future can anticipate problems and proactively manage around them in order to get the ownership transition they want.”

That approach has become increasingly important in recent years, Couzens explains.

Twenty years ago, for example, commercial banks were reliable financial partners that would commonly fund ownership transitions. Today, banking industry consolidation has greatly reduced this financing mechanism, making it much more difficult for a business owner to obtain the cooperation, support, understanding and guidance from its commercial bank. “Even in small towns and in situations with personal relationships,” says Couzens, “it’s just not common for banks to take on this role so readily.”

Demographics also play a role, what with the huge number of Baby Boomers who are expected to retire over the next few decades. “There is a significant oversupply of businesses that will come on the market for sale in the next 10 years related to the retirement of the first cohort of the Baby Boomer generation,” Couzens says. “As a result, ownership transition alternatives will not be available the way they have been in the past.”

The nuts and bolts
For the company that lacks a succession plan – or that wants to rev up an existing arrangement – Couzens says the first step is for the owner (or company leaders) to look past his or her own reign and consider what business ownership goals will be important after that departure takes place. “Think about to whom you’d want to sell the business and why,” Couzens suggests.

Once those goals have been determined – along with any other preferences or constraints related to the ownership of the business – owners will need to create scenario alternatives for the various ownership transitions that could take place: Is there a family member in line for the position? Perhaps a senior executive who knows the firm inside and out and shares its vision and goals? Would you be willing to hire a seasoned executive from “outside” to take over your position?

“Rank each of these alternatives based on your preferences and constraints,” Couzens says, “and then build business cases for each alternative to better understand the resources required, the risks involved and the key milestones.”

This information will form the cornerstone of a good succession plan, which Couzens says should also factor in (under the guidance of an attorney and/or accountant) tax and estate planning considerations. He cautions business owners to not mistake this type of tax planning for succession planning.

“Most business owners get the tax-driven scenarios without much consideration for their personal preferences,” says Couzens. “As a result, most ownership transition deals get done for tax purposes, whether or not it’s the right or best deal.”

Once in place, Couzens says business plans should be put in writing, reviewed quarterly (with the firm’s leadership and/or management team) and updated annually. Tom Hubler, president of Hubler Family Business Consultants in Minneapolis, says all family members who are involved in the business should have a chance to review and comment on the succession plan.

“Family members need to understand the plan and how it’s going to work, including the estate planning aspect of it,” says Hubler. He suggests presenting such information at an annual family meeting, which can provide the perfect backdrop for succession planning. Because only 30 percent of family businesses make it to the second generation of ownership, and 23 percent survive for the third generation, Hubler says succession planning is particularly important for family-run companies.

And many of them are waking up to that fact, says Hubler, who often works with family-run firms. “Family businesses are much more astute, and are planning ahead and not waiting until there are problems,” he says. “Instead, they’re taking initiatives.”

Put it into action
John Lendrum, president at Norwalk Concrete Industries in Norwalk, Ohio, is the first to admit that his firm doesn’t have a succession plan in place, but that doesn’t mean the family-run precast manufacturer hasn’t thought about getting one together. In fact, Lendrum says his three-location, 80-employee firm is looking past its current “emergency plan” and is interested in creating a more formal approach to succession planning.

For Norwalk Concrete, the last “handing of the reigns” took place in 1991 when J.T. “Tom” Lendrum (John’s father) stepped down and handed control to Lendrum and stepbrother Jeff Malcolm, who is now vice president. The handoff went smoothly, according to Lendrum, who says one of the best moves his father made was to completely remove himself from the company upon retiring. “My dad was very up front about what he wanted and how he structured things,” says Lendrum. “It was all in writing, and the day the agreement was signed he walked out the door and was gone for eight months.”

Now Lendrum says he and Malcolm are looking at how well they’d do at handing control over to the next generation. Both have children just starting college (as well as a few younger ones in grade school) and are pondering the issue of succession planning. “We realize that we have to set out a plan and make everyone aware of it,” says Lendrum. “It’s about preserving both the business and the family unit.”

To get there, Lynn Daniel, president of strategic planning firm The Daniel Group in Charlotte, N.C., suggests a three-step process that starts with a strategic plan to clearly outline the firm’s future direction, then match that vision up with the skills and capabilities required to get the company to that level.

Next, Daniel says the company must assess its current leadership in view of the present and future expected environments. Find the strengths and weaknesses of each of the individuals who could lead the company in the future, he adds, then match the internal strengths and weaknesses with what the company needs both now and in the future. Ask yourself questions like: Where are the gaps in skills and capabilities? What does the company need in its leaders to be more effective?

“Once you’ve identified these key players, create a plan for helping each individual develop the skills and capabilities needed to be more effective,” says Daniel. He advises precasters to write down any and all developmental ideas and plans for future use. Ultimately, those notes can be used to create a succession plan that takes the firm to the next generation of leadership (be it family-run or not) and beyond.

“Sit down and think about what you want your company to look like in five years, then look at what it’s going to take in the way of human skills and capabilities to get there,” says Daniel. “This simple exercise can really get you thinking differently – and more effectively – about the issue of succession.”