Michael Beck

Why Effectively Developing Your Own Successor is Nearly Impossible

More and more business owners are finding that selling their company to an outsider is becoming increasingly difficult. As a result, they’re realizing that selling to a successor is the best way to receive the full value of their business when they retire. The plan will work beautifully as long as the business makes all the buyout payments. But the business’ ability to make those payments relies on the successor not screwing things up!

In order to maximize the likelihood that the successor does a good job and makes smart decisions, he or she must be developed effectively. In addition to learning about the business, they need to develop their leadership effectiveness, their strategic thinking, and their judgment. And therein lies the challenge…

It’s nearly impossible for an owner to effectively develop their own successor!

Here are the five issues that prevent an owner from properly developing their successor and what to do about it:

Interpersonal Dynamics
In order for meaningful improvement to take place, open, honest, challenging, and confidential conversations with the successor must take place. But it’s virtually impossible for a successor to be completely open, honest, and vulnerable when those conversations are with the person who will decide whether they will be taking over the company.

It’s unrealistic to expect a successor to acknowledge their shortcomings and fears in a conversation with the owner. It’s unrealistic to expect a successor to share their frustrations and dissatisfactions to that owner. And it’s unrealistic to for an owner to challenge a successor’s thinking or judgment and expect them to respond transparently and honestly.

The interpersonal dynamics between owner and successor make it nearly impossible for an owner to effectively develop his or her successor.

Blind Spots
Regardless of the number of years of experience we have, our level of intelligence, and the amount of education we’ve had, we all have blind spots. We can’t see what we’re missing. And because we have blind spots, it causes us to limit our thinking and the solutions we come up with.

In addition, when someone has spent a considerable amount of time in an industry and/or a company, they tend to develop “group think”. In other words, they tend to think about problems and seek solutions the same way others around them tend to think about and see those things. Group think limits the solutions we come up with.

Because getting past blind spots requires outside perspective, it makes it nearly impossible for an owner to effectively develop his or her successor.

Objectivity
Virtually everyone around a successor has an agenda – their co-workers, their spouse and especially the owner. They either want things to change or they want things to stay the same. They want the successor to act and make decisions in a way that gives them what they want. In order for a successor to hone their thinking and judgment, they need an unbiased sounding board.

Because getting objective perspective and having an unbiased sounding board are essential to improving a successor’s judgment and decision-making, it’s nearly impossible for an owner to effectively develop his or her successor.

Time Constraints
There’s a reason it’s called successor development and not successor training. The growth that needs to occur happens over time. It won’t take place simply by attending a workshop or reading a book. Development occurs as a successor deals with everyday issues and then gets outside perspective to shift how they lead, think, and interact.

Most owners simply don’t have the time needed to give a successor the attention required for effective development. Consequently, it’s nearly impossible for an owner to effectively develop his or her successor.

Skill Set
Let’s face it, successful business owners are pretty expert at the business of their business. They couldn’t have gotten where they are without developing that expertise. But in order for a successor to succeed in their development, they need to be coached and mentored. Mishandling this will produce mediocre results at best and may do more harm than good.

The truth is that the skills that got owners to where they are aren’t the same skills required to effectively coach and mentor a successor. By way of example, a seasoned professional executive coach goes through extensive training and years of practice to hone their coaching skills.

Because coaching and mentoring don’t come naturally to most owners, it’s nearly impossible for an owner to effectively develop his or her successor.

In summary, it’s critical for a successor to be properly developed so the business thrives after the owner leaves and all purchase payments get paid. In order to maximize the likelihood of that happening, it is essential to bring in outside expertise to help complete the development of a successor. The risk of handing your company over to a poorly prepared successor is too great to leave their development unfinished.

If Your Successor Isn’t Progressing Fast Enough…

Preparing a successor to take over a company is serious business. You’ll be putting the business you’ve built into someone else’s hands and trusting them to maintain and grow it. No doubt, you’ve anticipated the need to groom someone and have started their development in plenty of time to be ready to take over when the time to retire arrives.

But what if, as your timeline for retirement approaches, he or she isn’t ready? Does it mean they really aren’t capable of taking over? Does it mean you should consider selling your company to an outsider? Maybe. But before you make that decision, consider these three factors that may be hampering their progress…

You may not be allowing them sufficient opportunity to make decisions and make mistakes.

Let’s face it, you’ve been in charge of your company from its inception. You’ve made all the major decisions, you’ve made your share of mistakes, and you’ve learned from the mistakes you’ve made. It’s not easy – nor is it natural – to relinquish that decision-making role.

But if you don’t allow your successor to start making decisions they won’t build their self-confidence and it won’t help build your confidence in them. Additionally, without gaining experience making important decisions (and possibly making mistakes) they won’t improve their judgment. And finally, it’s better that they make mistakes while you’re there to correct them rather than making those mistakes in your absence.

If you want to accelerate your successor’s competence, have them start making the less critical decisions. Then have them make more critical decisions collaboratively with you in order to learn from you as soon as possible.

As the owner/parent/relative, you can’t or aren’t free to say what needs to be said.

Often, because of family dynamics and/or company politics, even when you know what needs to be said, you can’t. You can’t because you and the successor have history, and with history comes “baggage”. Also, if you’re related, you often can’t say what needs to be said because of all the family dynamics that exist – parent/child issues or issues with siblings (yours or theirs).

Even if you decide to speak your mind, you run the very real risk of worsening a situation or alienating your successor.

The most effective means of helping them improve and changing their perspective is to have someone work with them who doesn’t have history, baggage, or an agenda. Having someone offering outside perspective – like an experienced executive coach – is a smart solution to the problem.

You and your successor have blind spots, which limits your ability to help them.

Regardless of how much experience a person has, how intelligent they are, or how much education they’ve had, we all have blind spots. We can’t see what we’re not getting. Not only do we have those blind spots, but our years of experience often cause us to approach problems in familiar ways, preventing us from seeing alternative solutions.

That being the case, trying even harder will only produce modest, incremental changes at best. Typically, the only way past our blind spots is to have someone point them out to us. It calls for a fresh set of eyes and some new perspectives.

Consider working with an executive coach and/or having your successor work with one so blind spots can be revealed and new perspectives can be adopted.

Successor Insights: The difference between wanting to own a company and wanting to run a company

There’s a big difference between wanting to own a company and wanting to run a company, and knowing where your successor stands on this point is critical.

Owning a company can be exciting. There’s a certain feeling of power in being able to say you own a company. Not only does it give a person added stature by being the owner of a company, but in many cases, creates a kind of “celebrity” status. The idea of owning a company can be heady stuff.

As owner, you’ve got full authority and are the final decision maker. When you own your own business, you’re your own boss – there’s no one to answer to, no one to ask for time off, and no one to ask for a raise. As owner, you’re in complete control.

These are the very reasons that many people dream of owning their own company. Or more accurately, it’s that perception of what being an owner is that causes people to want to be one.

But anyone who has owned and run a business knows that the realities of owning and running a business are a bit different than those noted above. Franchisors have long recognized this. Rarely will a franchisor sell a franchise to someone who isn’t going to be running the business (hence the term, “owner-operator”). Only after a franchisee demonstrates their ability to successfully run the business will a franchisor sell someone additional franchises.

Running a business is hard work. Running a business requires self-discipline and dedication. It requires you to do what needs to be done when it needs to be done, whether you’re in the mood or not. Running a business requires sacrifice. It can require you to forego personal plans and family time for the sake of the business.

Running a business requires passion. An owner of a business who is apathetic will accept mediocre performance. And attitude – whether good or bad – is contagious. Running a business requires decisions to be made – sometimes hard decisions. Important decisions will need to be made that not only impact the profitability of the company, but will affect the livelihoods of the people who work for the company. Those decisions often weigh heavily on an owner.

Because there’s such a big difference between wanting to own a company and wanting to run a company, it is essential to determine where your successor stands on this point.

The challenge, of course, is that talk is cheap. Simply asking him or her if they want to own and run the company will almost always yield the answer you hope to hear. The only true means of determining your successor’s desire and ability to run the company is to have them run it.

It’s not that you hand over the keys and step away, but rather you should start giving him or her increasingly greater authority and responsibility. This will allow you to observe how well they’re prepared to take over, while still allowing you to prevent any major missteps and make course corrections for mistakes. This mentoring, in conjunction with leadership development and improved strategic thinking, will ensure that they are prepared to own the business, prepared to run the business, and prepared to successfully lead it into the future.

A good way to accelerate the process of grooming a successor is to have an objective assessment done of their leadership skills, their strategic thinking, and their decision making.

If you’d like help in assessing and/or preparing your successor, please contact us.

There’s No Need for Succession/Exit Planning

There’s not really a need for succession or exit planning. Basically, a few months prior to your planned departure, contact a business valuation expert to determine the value of your business, then either find a buyer or choose a successor, engage an attorney to draw up the necessary paperwork, execute the papers, get paid, and transition into retirement. It’s all pretty straightforward.

In fact, there are only a handful of reasons where that plan may not be sound. Here are the issues, the consequences of those issues, and the remedy for each.

REASON #1: BUSINESS VALUE

THE ISSUE:
The value of your business ends up being below (and sometimes, far below) the value you need or want.

THE CONSEQUENCE:
The consequence of this is self-evident. The business won’t sell for enough money.

THE REMEDY:
There are many factors that go into determining the value of a business – things like profitability, profit trend, strength of the remaining leadership, effectiveness of systems, and customer diversification. The challenge is that each one of these factors takes time to impact the value of the business. In fact, they often require several years to make a difference.

The remedy, therefore, is to have your business valued two or three years in advance of your planned retirement in order to determine whether changes need to be made. Use a qualified business valuation professional to give you an unbiased valuation of your business. Doing this in advance will give you the time to implement any changes and increase the value of your business.

REASON #2: TRANSACTION STRUCTURE

THE ISSUE:
There are a number of fundamentally different ways a transaction can be structured.

THE CONSEQUENCE:
If you choose the wrong structure to your succession or exit, value can be negatively impacted, plus you may end up paying far too much in taxes. In addition, it’s not only about choosing the best structure but the timing as well, because a number of these strategies must be put into motion long before the actual transaction takes place. The consequence of waiting until you want to retire before you address this issue is that you won’t be able to consider many of these options, resulting in a lower business value or a higher tax bill.

THE REMEDY:
The process starts with understanding your financial needs for retirement. Next, the value of your business needs to be determined. And then, the tax implications need to be estimated.

Once you know where you stand, the best structure can be determined for the transaction and transition, and the appropriate measures can be put into place to minimize taxes and maximize cash. An experienced exit/succession professional can help you determine whether an internal sale, external sale, ESOP, trust, or some other structure would best serve your interests.

REASON #3: COMPANY SUCCESSOR

THE ISSUE:
You know who you’d like to choose as your successor, but grooming someone in the mechanics of the business does not ensure leadership development or their success as an owner.

THE CONSEQUENCE:
If a successor isn’t properly prepared to take over as an owner, the consequences can be disastrous. Poor judgment and poor decisions can quickly undermine the success of a company. Poor leadership can cause an exodus of key people from the organization. And a poorly run company will cause customers to leave.

Obviously, the consequences of a poorly groomed successor are declining revenues, reduced profits, and diminished cash flow, which result in the inability to make purchase payments to you. If that happens, it will require you to come out of retirement, rebuild the company and (hopefully) find a new buyer.

THE REMEDY:
A successor needs to master a number of leadership competencies, hone his or her judgment, refine strategic thinking, and adopt an owner’s mindset. An objective assessment should be done followed by leadership development tailored to the results of that assessment. This is often a one to two year process. This development requires coaching from an experienced executive coach and mentoring from you, the owner.

REASON #4: THE UNANTICIPATED

THE ISSUE:
You’re confident in how you’ll orchestrate your retirement from the business, but then the unexpected happens – death, disability, divorce, dissolution, etc.

THE CONSEQUENCE:
If your exit from the business is triggered by anything other than a voluntary sale, then the successors, survivors, family, employees and everyone else will suddenly be thrust into a very difficult situation. If you suddenly have a stroke, it probably will not occur at a convenient time (it never does) and will happen without warning.

If you haven’t done any planning in advance, the value, the transition, and the future of your business will all be thrown into chaos and uncertainty. The fitness of the business will be jeopardized and the consequences can be devastating.

THE REMEDY:
As with each of these reasons, business owners who plan ahead have better results than those who don’t. A well thought out and well structured succession/exit plan will address not only a planned event, but unplanned events as well. The consequences of an owner’s death, disability, stroke, etc. prior to retirement can be mitigated by having a comprehensive plan in place, a well prepared successor in place, and the proper funding mechanism in place, all well in advance.

CONCLUSIONS:
On the surface, it seems like planning an exit or succession is fairly straightforward and can be accomplished in about three to six months. But the truth is that if you want to maximize your company’s value, minimize the taxes you’ll pay, maximize the cash you end up with, and ensure your company continues to thrive, you should start planning and taking action several years in advance of your exit. Start to lay the groundwork now. Waiting only limits your options.

If you’d like help with any of these issues, I can refer you to qualified professionals in your vicinity. I’ve built a network of experienced professionals around the country who can help. Just give me a call and I’d be happy to recommend some people. Michael Beck, 503-928-7645, mbeck@elicitingexcellence.com, www.ElicitingExcellence.com

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Two Children. One Successor. Now What?…

It’s a challenging scenario. An owner has two children (or two executives) who each want to run the company after he or she retires and, of course, each child feels they are best equipped (or most deserving) to run the company. But there can only be one person at the top. (Having co-presidents or 50/50 owners can be a disaster.) Additionally, it’s important that the company and its cash flow continue to grow, since in most cases the price/value of the business will be paid out over time. And finally, besides needing the company to thrive, the issue of family dynamics comes into play. Because of these issues, it’s essential to get this decision right and to handle the implementation effectively. Choosing one over the other, if not handled properly, will surely lead to hurt feelings, resentment, and tense holiday dinners.

Here are the four ways to resolve this situation…

1. Let Them Sort it Out Themselves
Allowing them to resolve who should be in charge may seem like the smart approach because you (and your spouse) don’t have to take sides, thereby avoiding any resentment towards you. But it doesn’t work that way and you run the risk of the business failing.

Although it may seem like you’d avoid resentment, the child who “loses out” will likely resent the fact that you didn’t believe in them enough to choose them over their sibling.

And though it may seem like it should be an issue of “survival of the fittest”, it may very well be survival of the most hurtful, most manipulative, or strongest willed – none of which ensure that he or she has the vision and leadership qualities needed.

All in all, this approach is not very effective.

2. Choose One Over the Other
This can be the best solution if it’s handled correctly. If you can be objective about who should run the company, not only will you maximize the likelihood that the business will thrive, but you’ll effectively make the case for your decision.

This approach starts with an objective assessment of each person’s leadership competencies. The assessment will provide good insight into how each leader is viewed by those around them. In addition to the assessment, you should have each of them express their vision for the company going forward. Asking for their vision of the future will help you determine whether they have good judgment and if they’ve been giving thought to growing the company. Once those pieces are completed, it is often self-evident who the stronger succession candidate is.

Sometimes the person you’ll pick will be ready to take the reins right now, but many times, they will still need further development to be most effective. Either way, it is generally fairly straightforward to make the case for your decision in a dispassionate, objective manner, thereby minimizing any feelings of resentment. And you’ll have chosen the one most likely to succeed.

3. Split Responsibilities Between the Two
This approach is a variation of the second approach and can also be a good one if the siblings aren’t battling one another. Sharing responsibilities based on their respective strengths can be a smart strategy. The only problem is that ultimately, there needs to be one decision maker. This approach will also still require you to choose which child has final say, so you’ll still have to name one as the person in charge.

4. Sell the Business to an Outside Party
Selling your company to a third party ensures that you get paid the full value of your business. It avoids having to choose between two children and it may sidestep feelings of resentment.

There are, however, two potential issues with this approach. One is that there may still be feelings of resentment about not having confidence in one or the other of them to have selected them as successor. The other issue, of course, is that the business will no longer be in the family and your legacy will be lost.

In summary, the best way to handle the situation of having two or more potential successors is to make (and justify) your decision as objectively as possible. Following this strategy will minimize feelings of resentment and maximize the likelihood that the business will thrive, you get paid the full value for the business, and your legacy continues.