The TV show, Succession, portrays a somewhat typical view of the kinds of businesses where succession matters: large corporations with billions at play. It also portrays just what happens when a business does not plan its succession properly. The truth is that succession planning matters and it matters not just for large corporations, but for small businesses too. The 31.7 million small businesses in America account for 99.9% of its businesses. Yet, just 60% of small businesses lack a succession plan and this is particular true of family-owned businesses. The Family Business Institute estimates that just 30% of family-owned businesses pass on to the second generation; only 12% make it to the third generation and only 3% make it to the fourth generation. The absence of succession planning weighs heavily on these firms. Small businesses need to educate themselves about the importance of succession planning, and the key elements they need to increase the odds that their business will pass on to the next generation.
Succession Planning Begins at the Beginning
Typically, business owners and the public at large, believe that succession planning is something that enters the conversation toward the end of a founder’s life or tenure at the top of a business, much as happens in Succession, where an ageing Logan Roys tentatively begins the process of succession planning, when he begins to confront his own mortality. Yet, counter-intuitively, the best time to begin succession planning is at the beginning. By starting so early on, a founder can shape the culture and processes of the organization in such a way that succession occurs smoothly, and there are a wealth of options steeped in the culture and business practices of the company, available when the time comes to pass on the baton.
Typically, when founders draft their business plans, they make financial and operational projections, yet never seem to get round to making succession projections. It is assumed that when the time comes, the leaders the company needs will be in the business. Yet experience and data shows that often, businesses fail to find the right leaders to take over even the most successful businesses. It is assumed that succession planning will be smooth, yet many businesses fall to infighting and backstabbing, largely because the culture of smooth transition does not exist. You cannot assume things that are vital to the longevity of the business. You have to create the conditions under which those things will thrive.
Succession planning is difficult and it’s difficult for a good reason: there are different kinds of companies with different personality and ownership dynamics and so, there’s no silver bullet to solve the problem of succession planning. There are, nonetheless, a few key points that founders need to take notice of:
The most natural place to look for a successor is within the family. It’s not so much a question of DNA as shared values from being part of the same family. It’s hard to replicate that with a person outside the family. Look to your family to see if there is an outstanding candidate with the talent, desire and ambition to lead the company. Groom that person early on. Involve them in the company. It’s important however, to treat them like the other employees in terms of how they are assessed. Giving them a pass undermines their own need to learn, and it creates resentment on the part of better qualified employees. Those employees may leave the company if they feel that they are being looked over in favour of a less competent family-member. A succession plan should not lead to you losing good people. Balance the need to have your family-member succeed you, with the need to be fair and ensure that they learn the business the way everyone else does. It’s important for another reason: subconsciously, if you keep giving a family-member a pass, you won’t be able to trust them with the business, so even when you step down, you will find it difficult to resist the urge to interfere.
Now, as much as you may want a family-member to succeed you, there may not be the right candidate within the family, or, nobody in the family may want to lead the company. Furthermore, an internal employee may be vastly superior to a family-member. It is better for a business to thrive under the management of an employee than for it to flounder under a family-member. Ultimately, a business has to create shareholder value, so you need to leave the business in the right hands. As with family-members, you want to find someone who shares your values, is talented, driven and ambitious. Identify this person early on and if you don’t find that person, look for them. Give them responsibilities, learn to delegate. Life is uncertain, you could drop dead any minute. You have to treat succession planning as an urgent issue. The sooner you can find the right people to groom, the better. Steve Jobs poached Tim Cook from Compaq in 1998, because he saw what a great leader he would make. This year, he celebrates a decade as chief executive officer (CEO) of Apple, having taken on that role when Jobs was still alive. Vision is not just about products and services, and markets and business models, it’s about people and succession planning too.
One avenue for succession is for the company to be sold when you step down, or pass away. Ideally, you will identify an entrepreneur or investor you can sell the business to. This assumes that the business does not depend on your involvement for its success. The business must be able to stand on its own. As wonderful as it is to feel indispensable to an organization’s success, a great CEO makes himself completely dispensable. If you can create a business that runs itself and runs itself very well, that is to say, efficiently and profitably, then, you have a business that someone else could be interested in owning. Your job is to decide in advance when you want to retire or step down, and then sell the business, allowing for a bedding-in period in which you will guide the new owner, teaching them everything they need to know about their new business. Again, it’s important to find someone who shares your values, is talented and a great leader.
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