By Bridget McCrea
It could happen at any time, and without warning. A top manager learns that he’s ill and has to cut back on his workload. A key leader in the company is courted away by your top competitor. Someone wins the lottery and decides to stop working and enjoy life with $20 million in her pocket. Okay, so the last scenario is a bit far-fetched, but you get the general idea: A business is only as good as the people who run it and work for it, and the dynamic could change at any time and for any reason.
It’s impossible for a company to be completely insulated from the effects of an unexpected retirement, job change, illness or death, but the good news is that there is a way to ensure continuity of ownership and management long before the unexpected happens. The process is known as succession planning, and only a small percentage of firms use it to their advantage.
“Companies tend to procrastinate for various reasons, and by the time something happens to upset the leadership structure it’s too late to properly plan,” says Dale Walters, CEO at West Palm Beach, Fla., wealth management firm Keats, Connelly and Associates. He adds that poor planning can lead to skittishness among employees, who know that the owners who hold all of their cards close to the vest put their companies at risk should something unexpected happen. And if owners aren’t open to discussing employee buyouts and other strategies, the best workers may move on to an employer that is open to such exchanges.
Enter succession planning, a process through which company owners and managers map out appropriate actions to take in the event that a key person within the firm becomes unavailable and/or unable to work, be it voluntary or involuntary, expected or unexpected. Such plans address the various scenarios, and are created around the philosophy that leadership changes are inevitable (and challenging) for companies of all sizes and across all industries.
What goes into it
At its heart, a good succession plan ensures the smoothest transition possible when that “inevitable” event occurs, thereby maintaining accountability and stability during a time when unprepared companies may quickly find their operations in turmoil without their fearless leader or leaders at the helm. By developing a plan that’s as realistic as it is measurable, companies can head off problems down the road and be better prepared when the time comes for a management and/or ownership shift.
The process is much more effective than simply procrastinating until it’s too late, says Walters. “Anytime you procrastinate you wind up with a shorter timeframe when the inevitable happens,” he says. “The goal is to get your house and books in order as if you were going to show them to the world.” In other words, act as if you were selling the company to a third party, and consider what type of questions he or she would ask, such as: Does this firm have good processes in place? Are they documented? Is there a clear path for growth?
Answering those questions isn’t always easy for the business owner who is mired in the day-to-day activities of running a company. “If the only reason the company is operating is because of you, and if you’re leaving, then the new owner will have a lot of work to do,” says Walters. “It takes a lot of time to get everything in order, and many times business owners just don’t see this type of planning and due diligence as important.”
To ensure that the precast manufacturers he works with develop the most effective succession plans possible, Brian Middleton, president at Brian Middleton & Associates Ltd., Bedminster, Pa., starts the process with a 45-minute presentation that clearly outlines what areas are likely to be most challenging for the specific firm. “We discuss family issues, governance problems and the fact that most entrepreneurs run successful ‘operational’ companies, but tend to handle the tactical and strategic aspects intuitively,” says Middleton.
While all aimed at the same basic goal, succession plans often take different shapes and sizes, depending on the company. Peggy Hollander, managing partner at The Succession Group in Coral Gables, Fla., says her client list includes numerous firms in need of succession plans. Recently, she worked with a family-owned firm to create an exit strategy for the company’s founder (the father), who was transitioned into the chairman of the board position, and his son, who serves as president of one of its subsidiaries.
“If something happens to the father, the son can gracefully exist or do whatever he chooses to do,” says Hollander, who sees the initial leader’s role as one of mentor for his offspring, who in turn have the autonomy necessary to “tweak” company strategies in order to keep the firm on a growth path in the changing business environment.
Hollander also just finished working with a real estate development firm run by four partners who needed a clearly defined sell agreement among each other to determine what would happen to the firm upon their deaths or departures. After much discussion, the foursome decided that upon death, a defined amount of money would be paid out to the partner’s family, which in turn would not be involved in the business itself.
“They didn’t want to be in business with the partners’ spouses or children, so they came up with a buyout agreement,” says Hollander, who advises firms to be as specific as possible when drawing up their succession plans to avoid confusion when the time comes to implement them. “I’ve seen situations where parts of the plan were very vague and where the open lines of communication just weren’t there. When called upon, these plans usually fail to do their job.”
Putting the pieces together
When it comes time to put pen to paper and draw up a succession plan for your company, consider first where you would like it to be five, 10 and 20 years from now, and who should head up the business at those different intervals. Ask yourself the following question: “If I weren’t here today, who would run my business?” Involve your board of advisors in the exercise, or – for smaller firms that may not have such a group – get input from your CPA, lawyer and other business advisors.
“Use a team approach, and envision what you want to have happen to the company,” says Hollander. “Do you want to sell it to a third party? Do you want the next generation of your family to run it? Do you want to sell it to a non-family member who works for the firm? All of these questions should be considered and answered during the planning process.”
Also consider when the plan should be implemented, says Walters. The Baby Boomer owner who has no intention of retiring anytime soon, for example, will be working on a longer timeline than the pair of business partners who are in their mid-60s and considering retirement in the next 10 years.
Next, walk through the myriad of scenarios that could occur based on your succession planning decisions. If the firm is sold to a larger company, for instance, it could mean layoffs as the new owners bring in their own executives to run it. Conversely, if you sell the company to your current employee base, it could help create stronger loyalty among them now, and better customer relationships when the company ultimately changes hands (since those workers will have already bonded with your client base).
Get it in writing
As you go through the succession planning exercises, be sure to jot down notes on paper or on a spreadsheet. Use that information to draw up your final plan, which should be reviewed by key personnel, advisory boards and other involved professionals at least every few years. “Just because a father tells his son that he’s going to give him the business doesn’t mean it will happen,” says Hollander. “But if dad gets it down on paper and in his will, then the odds of the proper succession taking place are much higher.”
Other key considerations for businesses in the midst of succession planning include how many members of the family are working in the business, which ones are out of the business, and which ones actually want to continue running it (versus taking a buyout, if applicable, and continuing to work for a non-family-run firm). Take the family that has three children, one of whom is in the business and the other two who have no interest in it. Most families would want to have the interested child continue with business – which is typically the family’s largest asset – with the other two taken care of through an estate plan.
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, the process 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 multipronged approach to succession planning wind up with employees who are ready for new leadership roles as the need arises, and much better chances for success now and well into the future. “A good succession plan results in a continuity of leadership, a business that can continue going strong,” says Hollander, “and no big black hole when the leader isn’t there to lead the business anymore.”
Bridget McCrea is freelance writer who covers manufacturing, industry and technology. She is a winner of the Florida Magazine Association’s Gold Award for best trade/technical feature statewide.