Preparing For Transition: Management Succession Planning

Tuesday, April 03, 2012 19:30
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Preparing For Transition: Management Succession Planning

Tags: business cycles | business owners | business planning | business strategy | management | retirement | retirement planning | succession planning

In an entrepreneurial business, it is common for the primary owner to be the driving force of the company. The owner has cemented close ties with key customers and suppliers, is responsible for the “creative” aspects of the business (design work, sales strategy, etc.) and has his or her hand in every aspect of operations. This type of involvement gives the owner a feeling of control while providing the company (and its customers) with a charismatic leader. Unfortunately, a company dependent upon one (or a few) key player(s) is not easily transferred. Thus, his or her resolve for perfectionism can impede the ability to obtain significant exit value.

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The key to having a transferable business is to make the primary owner(s) (almost) unnecessary to the operation of the business. The emphasis should be on processes and methods as opposed to the key person(s)'s knowledge and interaction. In a service business, clients should be handled by a team of people, rather than just one person. Procedures should be standardized—even as far as having “procedure manuals” for each job function. The same holds true in a sales or manufacturing business.

Building good business relationships with customers and suppliers is essential to building a good business. However, the relationships should be “spread out.” Customers and suppliers should get to know many people in the company, not just the primary owner. All the people in the company should project the same company culture and values. This can be accomplished by having standardized procedures and a company-wide mandate for customer service.

To visualize this type of strategy, think of a particular retail store, hotel, or fast food chain where you know there is a general expectation for good customer service, quality merchandise/room/food, at reasonable prices. Customers know what to expect from these chain stores no matter who owns a particular location. The small business owner needs to build that type of consistency in his or her own company without being solely responsible for everything.

In addition to removing sole responsibility for the success of the company, the business owner preparing for transition must also identify a successor.  If the business successor is not readily identifiable, the business owner will need to put forth effort to identify and groom someone well in advance of intended retirement. If there is no key employee suitable for the future leadership role, the entrepreneur will need to consider other alternatives including

  • Hiring from the “outside;”
  • Training a group of employees;
  • Selling the company; or
  • Winding down the company.

When looking to hire a potential successor from outside the company, the business owner should first recruit key employees to assist in writing the job description and interviewing. By giving key employees a role in determining the future direction of the business, they will be more likely to support the transition and remain with the company.

An alternative not to be overlooked is the possibility of training a less senior employee. Since the leadership skills of lower level employees are not readily apparent, it is recommended that a group of promising employees be trained and groomed for higher level positions. Given enough lead time and proper training, a successor may emerge from within that group.

If the business owner is unable to identify and train a qualified successor, the business will need to be sold or liquidated. Since the latter means that no value will be retained by owner (or his or her heirs), without a successor, a sale will be the best alternative.

Even when an appropriate successor is identified, the actual transition from founding entrepreneur to the successor can be fraught with many issues. The founding entrepreneur may experience the following problems

  • Inability to let go of leadership responsibilities;
  • Inability to provide thorough training and information with which to take over leadership;
  • Feeling threatened by the potential success of his or her successor; or
  • Conscious or subconscious unwillingness to transfer authority.

The successor, on the other hand, may demonstrate the following problems:

  • Inadequate preparation or skills with which to take over leadership;
  • Laziness;
  • Inexperience leading to unwise business decisions; or
  • Egotistical attitude leading to unwise business decisions.

To avoid and counteract problems like those mentioned above, the founding entrepreneur and successor will need to thoroughly prepare in advance of the transition. Such preparation should include

  • Discussions addressing transition issues and plans;
  • On-the-job training;
  • Formal training, seminars and/or educational programs; and
  • Introductions to key suppliers, customers, and professional advisors.

Meetings and discussions should be held between the founding entrepreneur and the successor as well as with key employees. Additionally, it may be beneficial to bring in a management consultant to identify potential issues and facilitate open discussion. To effect a successful transition, both the founder and the successor will need to be emotionally mature and willing to compromise for the ultimate good of the business.

A detailed transition plan should be prepared beforehand. The plan should contain details regarding the timing of the transition as well as specific goals for the shifting of duties. The plan should be viewed as a “work in progress” and, thus, should be periodically reviewed and updated to reflect changing circumstances.

Comments (1)

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Joshco0752
The challenge with financial advisory firms is the reliance of it's clients on the owners of the business. Until the owners learn how to build an ensemble firm where it's customers believe it does business with the firm, the advisory business will not have built enterprise value. In my experience this is the number one reason advisory businesses have low cash components when the businesses are transferred. It's also why few advisory businesses ever truly build enterprise value.
Joshco0752 , April 05, 2012

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