10 Things Every Owner Should Know About Succession Planning
An owner’s guide to planning a successful succession.
You can read several books or my white paper about succession. The purpose of this article is to simply differentiate “exit planning” and “succession” and outline the main points for a CEO to remember when succession planning.
In the simplest terms, an exit plan focuses on your goals and monetizes the seventy percent of your illiquid wealth trapped inside your business, without being clobbered by taxes, retirement, and not outliving your money.
A succession plan focuses on the company’s successful performance without the CEO, creating a championship management team and moving them into leadership.
An exit plan is a customized written plan that monetizes a business; meets the owner’s personal and financial business goals, protects his or her wealth, keeps you from being clobbered by taxes—which can exceed 55 percent—and moves the owner into his or her next stage of life.
A succession plan provides a customized written plan that focuses on the human side of a business. Succession replaces the owner by moving the chosen performers to a championship management team and then into leadership. This requires time, training, and stretching the team members.
This may take several months to write and several years to execute. Depending on the readiness of a company’s management and the type of exit and current payout, a succession plan may last from three to 10 years.
On the other hand, if the business is systematized and has clean financials with a mature management in place, then the company could be sale ready in less than a year.
1. The Owner’s Mindset
The succession process does not begin until the CEO can start to see him or herself outside the business, has a flexible date and a written plan. My experience tells me the owner must be able to see their financial future before they can commit to a succession plan.
This stewardship will lay the groundwork for a successful transfer, the CEO’s legacy, and the company’s future. Francis Hesselbein said, “Successful transition is the last act of a great leader.”
2. Complete Your Exit Plan
A large part of the exit plan is income replacement for the owner, tax reduction, and legal risk reduction. The owner’s exit plan should be a process that allows the owner to see him or herself as financially independent outside the business, if not, the owner will never be able to separate from the business.
Legal agreements should be updated to protect the business and the owner’s estate during this process. Reoccurring problems we see are the coordination problems with the buy/sell agreement.
3. Establish a Clear Direction and Focus
The beginning of the succession process is a time for the senior management team to revisit the strategic plan, vision and mission. This process will be an exercise for the management team members to establish their roles, work as a team, and have a stake in the company’s future.
It will be the management team’s responsibility to take the reins and engage the company in this plan, communicate, and ensure the plan’s implementation. The direction begins at the top and this exercise will help the team to begin seeing their future.
4. The Odds Are Against Your Success
A Family Firm Institute study reveals how difficult it is for small businesses to succeed over generations and business cycles.
- 70 percent of companies fail to transfer into the second generation.
- 90 percent of companies fail to transfer into the third generation.
Think about the odds. If you started a business and passed it to your children, then your grandchildren would have about a 3 percent chance of continuing the business.
You may ask, what is the main cause of failure?
“At any given time, 40 percent of U.S. businesses are facing the transfer of ownership issue. The primary cause for failure … is the lack of planning.”
— Small Business Administration 2015
The CEO cannot afford to take this lightly. If you fail to plan, you plan to fail.
5. Develop Management Succession
Management succession is more than the replacement of talent; it is the development of talent. This is a time for the new team to reexamine and improve performance of the company’s systems in a process of continuous improvement for the company’s productivity and profitability.
The new management team should lead this process and educational effort for the entire company. It is a time for the owner to coach and stretch managers into champions, and monitor their success.
The most common exit in construction is the management buyout. These are structured over eight to 12 years to minimize the financial stress on the company. The owner will be depending on the management’s performance to create the profit and cash flow to pay you over this term. The good news, if structured properly, the management buyout can be very tax efficient. If not, the taxes can exceed 55 percent.
Remember this, the company pays for everything, the managers drive the company.
6. Develop Leadership Succession
Traditionally, you have strong managers who lead the company to meet deadlines and corporate goals. They must now rise to a higher level of leadership, set a corporate direction, and build consensus. How do you change their behavior, build self-awareness, and still maintain their spirit?
This change is accomplished through the light of self-awareness, acceptance of the truth, peer evaluation, experience, and personal coaching. There are many processes and proven exercises to move them to deal with their blind spot and move into the next level.
7. Understand Emotional Intelligence
Most of us recognize IQ, or intelligence quotient, from an educational system that heavily weighs this measurement. Now researchers use EQ, emotional quotient or emotional intelligence, as a measurement, as studies have found it is the key ingredient for leaders and millionaires.
The book Emotional Intelligenceconsiders non-cognitive skills to be more important than IQ in the workplace. The author Daniel Goleman states that emotional intelligence is reflected in behavior from self-awareness, how one uses gut feeling, self-control of emotions, empathy, and the ability to inspire and influence others.
8. Time is Your Best Friend with Succession
Succession and behavioral change take time, and the sooner you start training, the better your results will be. There are three parts to this training: education, coaching, and stretching.
You will spend about 30 percent of your time with the first two parts: education and coaching. The key is to leave 70 percent of your time for the stretching process. This is where managers are field-tested, apply their learning, make mistakes, adapt, and mature, therefore, the most important aspect of the process.
9. Coaching the New CEO
Every CEO must realize his or her role with the new successor is to make sure he or she is prepared to lead the company. Meet and decide collectively the process, timeline, and curriculum.
Remember, this process is all about the new CEO, not you. Your role is to teach, coach, and ensure the company’s future success. The new CEO’s management and leadership style likely will differ in some way from your style. Let the new CEO find his or her own path unless you see a disaster in the making.
10. The Lame Duck and Letting Go
For each CEO, the succession process is different—but the same. You will feel like a lame duck, it will be more emotional than you thought and you now must focus on life outside the business.
Eventually, your phone will stop ringing, managers will bypass you, and move directly to the new CEO and you will be out of the loop. When this happens, the good news is that the process is working as it was designed to and you have succeeded where most CEOs fail.
Congratulations, and welcome to the Lame Duck Club.
For my free white paper on succession, email me at KJKennedy@BeaconExitPlanning.com