I recently received a copy of a Human Capital Media survey report about succession planning-which companies have them, trends in developing one, and how a succession plan is integrated into other business functions and decisions. I found the results of the research fascinating and thought-provoking. For example, did you know that only 37.3 percent of the responding organizations already had a written succession plan, but another 45.5 percent were working on theirs? That tells me smart business owners see value in developing one and doing it now-regardless of the motivation to do so.
Many survey takers cited “having an exit strategy for the business” as the reason for putting together a succession plan-mainly for the purpose of selling it. Others claim a succession plan is appropriate to ready the owners’ children to take over the reins. Family-owned businesses account for a staggering 50 percent of the gross domestic product of the US, and it is not just in small storefronts or home-based businesses. In fact, 35 percent of Fortune 500 companies-both privately and publicly held-are controlled by families. But, history shows that only one-third of family businesses successfully pass the baton to the next generation.
Continuing a business beyond its founding generation of leaders requires a sound strategy and methodical planning. Don’t shy away from succession planning just because “there’s plenty of time for that later on.” Devising a formal succession plan now could mean outlining how to prepare someone who would be able to step into the shoes of key personnel in the event of something happening unexpectedly. Or, perhaps, giving yourself-as the business owner-peace of mind that all will be fine once you don’t want to be involved in the day-to-day. For whatever reason, succession planning is a critical-path, decision-making process that has a direct impact on long-term business viability and profitability and it warrants some consideration.
Myths and realities
David Scott, VP of Advanced Sales at Penn Mutual Life Insurance Company, wrote an online article for WealthManagement.com sharing what he believed to be the myths and realities of small business succession planning. Along with the “there’s plenty of time” myth-which Scott dispels with the salient point that time is either your ally (if you plan during the good times) or your enemy (if you procrastinate and are forced to plan during more chaotic, uncertain or expensive times and your choices become limited)-he offers four other myths:
- “It’s easier to just sell it”
- “A successor will be ready when I’m ready”
- “Dividing it ‘equally’ among heirs is synonymous with being fair”
- “Giving up ownership means losing control and income”
Scott explains, “Finding a willing buyer for any business is rarely just a matter of hanging up a ‘for sale’ sign.” It’s really a matter of timing. Calculating the ‘fair market value’ for the business at a particular point in time, and then simultaneously finding a buyer who is able, prepared and eager to buy it right then, at that price, takes a good deal of luck and coordination.
Believing an adult child or designated apprentice-heir will miraculously “rise to the occasion” is wishful thinking at best, and foolhardy at worse. Scott states, “A successful succession plan builds into the apprenticeship not only the mastery of business tasks but, equally as important, the building of business relationships.” It doesn’t just happen on its own.
Let’s say a business owner-in the spirit of fairness-intends to divide a business into thirds, one part for each of three children. Except, one of the kids is the aforementioned apprentice, who pays his/her dues and does the work of developing business skills and relationships. Do you think that person will accept the other two siblings-who have chosen to pursue other interests, but only dabble in the affairs of the business the parent handed down to them-for example, telling him/her what to do, how to do it, while reminding everyone in the process that “hey, I’m an owner, too”? I don’t think so. Scott offers this sage observation: “While many things can be guaranteed in a successful succession plan, happiness among all family members isn’t one of them.”
Finally, the fact remains, an owner may still be paid-and handsomely, I might add-for fulfilling the role of executive advisor, Chairman of the Board or President Emeritus, all the while gaining the advantage of avoiding the headache from dealing with the daily minutiae in the shop and office. Business owners who believe creating a succession plan would strip them of their power and income fail to see the value in building their legacy via the plan.
Succession planning made easy
When it comes to succession planning, entrepreneurs can easily make mistakes, lose focus or take the wrong path. After all, the process is part science and part art. But if one applies some common sense and adopts a KISS approach, errors can be avoided and owners can take control of the process, rather than the process controlling them.
Let’s begin with the step-by-step approach touted by the Service Corps of Retired Executives (SCORE; www.score.org). SCORE is a non-profit association of more than 11,000 volunteers who delivers advice and guidance to business owners, at little to no cost, and has the backing of the US Small Business Administration. Actually, if you desire to have some face-to-face assistance in developing your succession plan, SCORE is a great way to benefit from a sage volunteer’s insight and first-hand experience.
SCORE advocates the following five steps to succession planning:
1.Choose your successor
2.Develop a formal training plan for your successor
3.Establish a timetable
4.Prepare yourself for retirement, and
5.Install your successor
That’s seems simple enough. Now, let’s broaden the effort and approach it from a slightly different perspective. Heaven forbid, something were to happen today to one of the key contributors to the success and growth of your enterprise. What would you do? Try this exercise…pull out the business’s organizational chart and identify-by title or position-the essential employees that make the business hum. Start with yourself, the owner, and head down the chain of command-asking yourself this question for each position: “If this incumbent employee were suddenly unable or unavailable to perform his/her duties and responsibilities-for an extended period of time-what would his/her replacement have to know and/or be able to do in order to fill in satisfactorily and get the job done?”
In years past, corporate America’s human resources department would rely on written job descriptions and formal performance evaluations to ascertain the specific job skills and work traits needed for each position. In smaller businesses, the practice of talent development is much more informal, if done at all. Nonetheless, consider asking every vital member of your shop’s team to list the five most important and/or most frequently performed task or skill they are expected to do. Meanwhile, ask that person’s supervisor to do the same. Typically, this exercise yields a list of about six to eight critical elements for each person’s job.
Next, try to identify one or two people, other than the incumbent, who could either fill in capably or could, in an established and reasonable amount of time, be cross-trained to assume the role in a pinch. If you come up empty, in-house, to appoint an understudy or you don’t think anyone has the aptitude or potential, you will need to start looking elsewhere. Still, it’s better to realize now that, should a key contributor in the business go down or leave the company, for what traits and abilities do you start looking, in a new hire or contracted temp, to fill the void. Repeat this step for every position that you deem mission critical.
If you find that even the incumbent falls short on some of the job skills needed to perform at a higher level, get that person and his/her potential successor some training in that area. Don’t make the mistake of sending them off for training and then not reinforcing, recognizing and rewarding their efforts to improve, once back on the job.
When you plan is well-developed and ready to launch, don’t just pull the ripcord and expect the successor to land softly and safely. Seize opportunities for a dress rehearsal. When any key employee goes on vacation, get your succession plan out and have that person pinch hit, but give them some latitude to do things “their way,” within reason. It’s a great time to be a hands-on coach, mentor and cheerleader for your people, and do it at your own pace and choosing.
Not every business, family-owned or otherwise, will survive and many do fail, primarily due to differing interests and the inability of the next generation to grow the business. Following the aforementioned five steps now is bound to save money and time in the long-run, and will help assure the continued success of your business.
While succession planning is a challenging task, it is worth the reward of watching your business grow and succeed with the next generation. As you work on your succession plan, be sure to seek the assistance of outside advisers such as your accountant, attorney, business coach and your investment or insurance professionals, since your succession plan will have far reaching impacts from a tax, image, investment and legal perspective. Good luck!