What triggers a small business owner to surrender control of their company, either by transferring leadership or ownership or both? Overwhelmingly, the circumstances surrounding succession in a business are predicated by one of two external factors.
- an unsolicited offer to buy
- a health scare.
Both are events outside the owner’s control, and yet many of my clients view succession planning as the job of the “old white-haired president”. Succession is certainly not something that they have to concern themselves with, at least not yet. Whether it is an immediate concern or a long-term consideration, take a page from the retirement experts: “You’re closer than you think.”
People own businesses in pursuit of profit. They invest time and resources for an expected return. Yet very few small business owners treat the factors that lead to a high valuation of their company with the appropriate degree of importance and urgency. If the circumstances surrounding your exit will likely be beyond your control, shouldn’t you make sure your business is always at its maximum value? Read on to learn the five steps to prepare for succession.
The Timeline of Succession
It takes one to seven years to choose and install successor. In that time, the successor must be trained in all aspects of the business, tested and allowed leeway to make mistakes in a controlled environment. Only after all of this may the owner confidently and responsibly step back.
For owners not just stepping back from leadership, but away from ownership altogether, it can take a further six months to two years to find a buyer and complete the sale.
The five steps below address what you need to do to be ready when that unanticipated external event collides into your business.
The Five Steps to Prepare for Succession
1. Develop the Succession Planning Team.
Developing a solid succession plan requires at least one unbiased third party. Accessing an impartial perspective is difficult, and can lead to procrastination around succession planning or worse, a sub-optimal solution accepted before any other options are explored. Typically, companies will ask their business accountant, banker, lawyer, or consultant to participate in the process. When setting up the team, assume that you are going to be a member and that you bring one of the following experience sets to the team.
Experience to look for:
- Industry specific
- Company specific
- Succession planning in your and other industries
- Senior management recruiting
The succession planning team is often comprised of several individuals with a diversity of skill-sets. Select people that can both propose and assist with the implementation of alternative succession options, some of which may not be obvious to you. Having the experience to know and present all of the options, play devil’s advocate, speak the truth without fear of retribution, and assist with developing the action plan and milestones are all critical characteristics to look for when recruiting your succession team.
2. Start with a Plan.
Typically, the plan outlines the current structure of the company and then the future state – the positions the company needs in order to effectively operate without you in it. If you are currently fulfilling the roles of president, sales manager and accounts receivable clerk, then all of those positions need to be listed separately in the current structure. This begins the process of identifying which roles you can move out of. It also helps your staff identify the roles you want to move out of – roles that they may be interested in pursuing if they knew there was an opportunity. The succession team helps guide this process by using its collective experience to identify structural considerations that may not be readily apparent.
3. Detail the Expectations for the Role.
What are the successor’s duties and responsibilities? Yes, an accounts receivable clerk makes collections calls, but how often? To whom? When do they write a letter? When do they get the controller involved? How do they track progress? And that’s just the clerk level. Now, what does the president do day to day? What are the specific duties, how often must they be performed, etc? There are likely more duties that should be added to your job description and others that are done out of habit, rather than necessity. The succession team has a role to play in reviewing these expectations for clarity and specificity to ensure every chance of a smooth transition.
4. Determine the Measurement Systems.
How will you know if the new president is meeting or even exceeding all of those expectations? Is there a way to measure progress instead of waiting for the end result? Of course annual profit will be a key measure, but on its own, it is not sufficient to evaluate performance. Was the uptick due to the new president’s contribution, cycles in the economy, the predecessor’s legacy, or other factors? It can take months or even years for you to know whether you made a sound choice in your selection of successor. It is therefore crucial to develop activity-based measures and routinely review them against actual performance.
5. Implement and Refine the Plan.
Assume you will select the wrong person. Maybe more than once. Assume you will select the right person who will leave for reasons either within or not within your control. The more time you allow for trial and error, the more stable and valuable your company, the more money you will receive when you sell, the more beautiful your vacation home in Maui will be. Give yourself plenty of time to get it right. It’s worth it.
Should I Spend My Time Working “In” or “On” My Business?
Many clients feel they are too busy working in the business to work on the business. “All of those steps would be fine if I could spend my days contemplating the future, but I have a business to run, customers to keep happy, products to develop. I don’t have time for all this planning stuff.”
If you want things to change, you have to do things, at least some things, differently. If you are buried in sales, marketing, product development, finance, etc, then you ARE the company. Any value you think has been created is eliminated if you are removed from the business. If your customers would not want to deal with your company if you weren’t selling the product personally, who do you think is going to buy your company without you as part of the long-term package? Even a small step toward handing off some of your duties will allow you to have more time to plan for how to hand off the next set of duties and eventually move yourself out of the job altogether.
Maybe you’ve tried succession planning before, but it “didn’t work.” Many have tried to short-cut the steps of a strong succession plan on their first attempt. The quick fix scenarios go something like this:
- Promoting the “only” choice in the existing company and not clearly defining the role, leaving them to guess at what to do
- Handing over full control in one shot and watching the successor drown
- Handing over very little control and undermining the successor at every turn
- Some other “quick fix” that is almost guaranteed to produce a sub-optimal result.
The succession path is a minefield. The earlier you start extricating yourself from the day-to-day the more time you have to implement the above five steps, work on the refinement of the plan and execute a fantastic solution. Pick the area of the business that you enjoy the least or needs you the least, and start there.
The E-Myth Revisited by Micheal Gerber is a classic book that discusses some of these issues. Don’t even have time to read a book? Listen to it on the drive to work – an hour commute will get you through this in a week and a half.