Ninety percent of U.S. businesses are family-owned, and one-third of the Fortune 500 is either family-owned or family-controlled. Only 30 percent of family-run companies today succeed into the second generation, and only fifteen percent make it into the third generation. Experts say this is primarily due to poor succession planning.
I think the same case can be made for succession within a business. Who will be the next number two if the current number two is no longer in that position? Who will head up the customer service department if the incumbent is promoted or quits? Who takes over for the sales manager when that position becomes vacant?
In smaller businesses there is no room for bench warmers and little free time to cross train. That means that when vacancies occur in key leadership roles little thought has been given to potential replacements. This poses a significant risk to the stability of the business. And if you are in a leadership job, you should do all you can to minimize this risk.
The time to make some contingency plans is when everything seems to be going well. Maybe that is right now in your organization. Now you have the luxury to test potential successors in different roles and responsibilities to see how they handle them. You can learn their strengths and weaknesses and prepare a line of succession for various jobs in your business that plays to individuals’ strengths and minimizes the impact of their weaknesses.
If you are searching for your own replacement as the CEO you need to go further than simply testing out capabilities. You need to think about the long-term stability of your business and determine the source(s) of a potential successor.
A timetable for replacing a CEO should be at least five years. This allows time to explore all the options and conduct discussions with your family, your senior managers, and key employees. Initial discussions should be informal and designed to help you select the source for your replacement. It may be that a family member is ideally suited for the job, or perhaps there is a senior manager who can step into the lonely position at the top, or you may conclude that reaching outside is a better decision.
Concurrent with exploring these options you need to develop a business transfer plan based on your current structure. Partnerships have different agreements affecting dissolution or buy out. Close corporations have other concerns regarding transfer of stock ownership. With a sole proprietorship finding a good approach to transfer ownership is important.
As important as finding the right person is finding the right price for the transfer, and determining the timing of the transfer of ownership. Determining the worth of your business is a tricky one, very subjective in many respects, and fraught with tax implications. A fair value for the transfer needs to pass IRS muster. Since businesses can be legitimately valued differently for different purposes, you should make use of a qualified outside firm to develop the price based on the goals of the transfer. The firm can also help you determine the appropriate way to finance the deal.
Whether you are transferring ownership or giving up the leadership of a division or department, you need to pay close attention to your role before, during, and after the transfer takes place. Once a successor is named the two of you jointly should develop a turnover plan that includes training the successor, a new job description, provisions for contingencies such as loss of others who wanted the job, and your personal plan for removing yourself from the “equation.” That last point may be the most difficult, especially if you are remaining in the business after a new leader takes over.
If you have taken the time for self-examination to determine why you want to move out, you will have developed the self-motivation to let go sooner rather than later. Perhaps you want to accomplish something more over the future years or you want to spend more time with your spouse. Maybe you have a set of goals that are completely outside the business and need time and freedom to pursue them.
Whatever you do, make sure you have something to look forward to once you are free from the job. A merger and acquisitions executive told me that his primary concern in helping a business owner sell the business is what the owner is planning after the deal closes. He said he wants to be sure that at the closing table the owner can actually pick up the check. If the owner does not know what he or she will do “tomorrow” and can’t say goodbye to the business it leads to disaster all around.
As the former owner of a racing sailboat I am sympathetic to the saying about boat owners: the two happiest days of owning the boat are the day you buy it and the day you sell it. While you really may not be totally happy the day you sell your business, it sure helps if you can look forward and not backward. Make up your mind to pick up the check, pack up your stuff, and go on to the next big thing in your life!
