Leadership

The Four Stages of Successor Development

In order for a successor to successfully take ownership of a company and lead it into the future, he or she must transition through four stages of development. If a successor takes over a company and has only mastered the first two stages of development, he or she is doomed to fail, because they’ve only mastered the mechanics of the business. In fact, studies show that 70% of successions fail! If, on the other hand, a successor is effectively developed through all four development stages, growth and profitability are maximized, employee turnover and customer loss are minimized, and the owner gets paid the full value of the business.

Stage One: Worker/Contributor
This is the stage where a successor learns the mechanics of a business. In this stage, successors become good at getting the work done. It’s about gaining knowledge of how the products and services of a business are created and delivered. Competencies in this stage involve acquiring technical and industry knowledge, along with improving technical skills. Improvement in this stage comes from technical training and hands-on experience.

Stage Two: Manager
This is the stage where a successor learns how to get work done through others. He or she learns to oversee projects and manage resources. Although they may still be doing some of the work themselves, their main tasks are to provide guidance to others and to have responsibility for overall production, productivity, and quality. Improvement in this stage comes from things like project management training, general management training, and hands-on experience.

Stage Three: Leader/Executive
This is the stage where a successor learns to lead rather than manage. It’s the point where people skills become more important than technical skills and knowledge, and an entirely new set of competencies comes to the forefront. In order to be an effective leader/executive, a successor must improve his or her communication skills and learn the art of influencing others in order to get buy-in for their plans and ideas. They must learn to foster teamwork and collaboration along with the ability to resolve conflict in a constructive manner. Additionally, a strong leader appreciates the need to develop others and masters that ability. And finally, in order for a successor to be effective as a leader, he or she must begin to enhance their executive presence. A leader with good executive presence is better able to instill confidence, build trust and earn respect. Improvement in this stage does not come from training. A person cannot become a better leader by simply reading a book. It requires the breaking of old habits and forming new ones. It requires the revealing of blind spots and limiting beliefs. And it requires a deeper understanding of human nature. These competencies are best honed though coaching and mentoring – all of which take time.

Stage Four: C-Suite/Owner
This is the stage where a successor learns how to lead an organization. It’s the stage where seeing the bigger picture becomes their job. In order to do this, he or she must hone their strategic thinking – moving beyond developing tactics to developing directions for the company that address fundamental problems or capitalize on opportunities. And it requires sound judgment in order to make good decisions. A successor at this stage must be able to develop a vision for the organization and have the ability to gain buy-in for that vision. In order to achieve that, he or she must have both organizational awareness and external awareness, looking beyond the confines of the company. The final piece in this stage is for the successor to develop an owner’s mindset. Up to this point in their career, most successors have only ever been an employee. The issue is that owners see things differently than employees. In order for a successor to shift from an employee mindset to an owner mindset, they need to change their perspective from short-term thinking to long-term thinking, from self focus to organizational focus, from internal focus to external focus, and from narrow/silo thinking to big picture thinking. Improvement in this stage is developed over time and occurs through coaching and mentoring.

Strategies for Successful Development
For purposes of this article, let’s assume that the successor has successfully mastered the first two stages of development. In other words, they’ve gained strong knowledge of the technical aspects of the industry and have gained experience managing projects.

In order for a successor to master the second two stages, he or she must be coached and mentored. If the owner takes on this task, they must adopt a “coach-like” style of leadership. This is a style that helps people grow and develop. The most effective means of coaching is to ask questions rather than give answers and these questions fall into two categories. The first set of questions gives us insights into the other person and the second set of questions allows us to give the other person new insights. The only way to know what questions to ask in order to give them new insights is to first discover where their thinking, judgment, and/or perspective is incorrect. That’s what the first set of questions accomplishes. This coaching will help them develop the necessary leadership competencies, strengthen their executive presence and improve their ability to think strategically.

The owner must also mentor the successor. This is done by allowing the successor to make increasingly difficult decisions. Only by guiding their thinking can a successor’s judgment be honed. Start with allowing them to make decisions that aren’t critical. In other words, a misstep won’t harm the company. As their judgment and thinking improves, have them participate in decisions which have greater impact.

The owner must also share the mistakes they’ve made in the past and the lessons learned over the years. Many times, lessons learned are not self-evident.

The Bottom Line
In order for a successor to effectively lead an organization into the future, they need to transition from contributor to manager to leader and ultimately to Owner. It is essential that development does not stop at mastering the mechanics of the business.

A good place to start is with our free Successor Readiness Questionnaire. It can give you a sense of how ready your successor is to take over.

If you’d like help assessing and/or grooming your successor, please contact me. Our conversation can help determine the preparedness of your successor and whether our services would be a benefit to you.

The Time-Value of Business Valuation

An important goal in any exit or succession plan is to develop the business in a way that maximizes its value. But the truth is that the value of a business is only realized if the owner actually gets paid that money. And therein lies the difficulty…

Many times with an internal sale to a family member or key employee, the buyer doesn’t have the cash to pay the full value up front. Therefore, the owner receives the majority of the business’ value over time, paid with future cash flow. The time-value of a business’ value is analogous to the time-value of money. In other words, money in hand now is worth more than the same money received later. To account for this timing issue, a succession plan is often structured so that the payout over time is higher than if a lump sum were to have been paid up front.

But most succession plans are structured assuming that all payments will be made even though studies show that about 70% of all successions fail! Therefore, the likelihood of future payments not being made must be taken into account when determining a business’ real value.

There are four ways to address this issue. One is to try to get a commercial bank to fund the sale in order to shift the risk. Unfortunately, many times this route is impractical. The second strategy is to front-load the payments, receiving the lion’s share of the value as soon as possible. Typically, this route is also impractical because it generally cripples the cash flow and working capital of the company, virtually ensuring that it will fail and be unable to finish paying the owner.

A third route is to have equal payments, but charge a much higher premium to offset the risk of non-payment. In other words, treat it as a high-risk loan. Like the previous approach, this generally impacts cash flow too heavily and jeopardizes the success of the company.

Therefore, the fourth strategy is the best solution if you’re serious about ensuring the likelihood that the full value of the business is realized by the owner. This fourth strategy is to reduce or eliminate the risk of failure. One approach to reducing this risk is to have the owner remain involved until he or she is paid in full. But of course, this approach defeats the whole purpose of selling the business.

A much better approach to reducing risk and ensuring success is to develop the successor more effectively. Most owners help their successor master the mechanics of the business. That’s not the problem. The problem is that there are a couple of critical competencies that won’t be addressed if grooming stops with the mechanics. First off, learning the business doesn’t necessarily hone leadership skills. Strong leadership skills are essential for success. Managing can keep a business running smoothly for a while, but leadership skills are needed to successfully take a business into the future – things like good judgment, strategic thinking, conflict resolution, and the ability to influence others.

The second critical competency is the need for the successor to adopt an Owner’s Mindset. Typically, up to the point of the sale, a successor has only been an employee. But owners and employees think and act differently.

Employees tend to think narrowly. They usually focus on the task at hand and/or on their specific domain of responsibility (operations, finance, engineering, etc.). In contrast, an owner needs to consider the bigger picture and how his or her decisions impact each aspect of the business.

Employees also tend to think short-term. Their focus tends to be on current matters, current revenues, current expenses, and current profits. They also tend to be reactive. In contrast, an owner needs to 1) consider both short-term and long-term success, 2) learn to make decisions without having all the information, and 3) must learn to balance risk and reward. (Rarely is a decision about the future risk-free.) And owners tend to be proactive.

And finally, employees know that if they make poor decisions or the business doesn’t do well or they become dissatisfied or they lose their job, they can always find a new job elsewhere. Owners, on the other hand, understand that failure is not an option. There is no “Plan B.” Owners understand that the business is their future, and this understanding must color their decisions and their actions.

When a successor’s leadership competencies aren’t developed and they haven’t adopted an Owner’s Mindset, he or she can’t effectively guide an organization. In the absence of these competencies, the future of the company becomes less certain and the future cash flow is put in jeopardy.

Please don’t throw an inadequately prepared successor into the role of leading a company. Whether you use our services or some other solution, bring in a professional to help – someone skilled in leadership development and experienced in working with successors. If you’d like our help developing a successor, please give us a call to discuss your specific situation. We offer executive assessments and executive coaching, all designed to help successors succeed and owners get paid.

Misuse of “The Hammer” by Leaders

I’ve never met an executive who thought they were a poor leader. Most will say there is always room for improvement, but that they generally do a good job. And yet… we all know people who are poor leaders!

These leaders often feel that they know what should be done and how it should be done. So they adopt a “command and control” style of leadership, “guiding” the people around them. If they aren’t successful at getting their way they “pound” on them – basically ordering them to do what they say. I call it “using the hammer”.

This approach is appropriate for urgent situations or emergencies, but is rarely effective in most other circumstances. At best, when a leader takes this approach, they simply get compliance from their people. At worst, they elicit passive-aggressive behavior. And to compound matters, the results gained form compliance are weak compared to those gained by a committed workforce.

In essence, they’re treating adults like children. This style of leadership demonstrates that they don’t trust or respect those around them. It shows that they don’t value them as professionals and it generally causes disengagement. Micromanaging is a common variation of this style of leadership.

If a leader really wants to bring out the best in people, he or she needs to treats adults like adults and professionals like professionals. Effective leaders learn how to influence and persuade people to buy into their ideas and suggestions. Effective leaders give people autonomy, allowing them to do their work in their own way.

That’s not to say that these leaders accept mediocrity. Far from it. In fact, this approach – when done correctly – allows a leader to hold people more accountable and it allows them to hold people to a higher standard of performance.

Besides, taking this approach doesn’t take away any power from the leader. A leader always reserves the right to use “the hammer” and tell someone exactly what he or she wants done. It should only be used when a leader’s powers of influence fall short and/or when someone’s judgment is flawed. A leader always has the prerogative of dictating what should be done and how it should be done. But using the hammer is a last resort when nothing else works.

Everyone feels they have something to contribute and want to be heard. The key to bringing out the best in people is to value and respect them. Eliciting excellence is the essence of exceptional leadership.

If you’d like help in refining your leadership effectiveness, please call. We offer assessments and executive coaching – all designed to boost your leadership effectiveness.

Common Shortfalls in Successor Development

When it comes to handing off their business to a successor, every business owner understands the importance of grooming their successor to take over. And most owners feel they’ve done a good job. But while most owners ensure a successor understands the business, many owners don’t do the leadership and ownership development required to help their successor succeed. In fact, studies show that over 2/3 of successions fail!

Here are three of the common mistakes owners make in developing a successor, along with suggestions on how to correct/overcome them.

BELIEVING THAT BUSINESS KNOWLEDGE IS SUFFICIENT
Most business owners know that a well-groomed successor should have at a working knowledge of operations, sales and marketing, customer service, administration, and finance. But this knowledge, although necessary, is not sufficient if a successor is to effectively lead a company into the future. In addition to having a firm grasp of the mechanics of the business, a successor must become an effective leader, have vision and foresight, think strategically, have good judgment, manage risk, and adopt an owner’s mindset. Each of these capabilities takes time to develop and requires regular coaching and mentoring by the owner and/or a professional executive coach.

In the absence of this development, a successor will be more likely to send the company in a poor direction, thereby jeopardizing future cash flow and profitability.

ALLOWING BLIND SPOTS TO RESTRICT THINKING
It’s very common for an owner (and in fact, an entire organization) to think and approach problem-solving in a certain way. The phenomenon is called “group think” and can even permeate an entire profession. “This is the way we do things around here…”

This pattern creates “blind spots” that prevent new, innovative solutions from being considered. In other words, these blind spots keep people from seeing what they’re missing. If an owner suffers from having too many blind spots (we all have them), he or she may very well pass them along to their successor. “After all, certain solutions have always worked in the past…”

The best way to reveal blind spots and enable creative thinking is to have a fresh pair of eyes and ears examining and challenging current beliefs. Almost always, an outside, unbiased and objective perspective is required.

FOCUSING ON SYMPTOMS RATHER THAN PROBLEMS
Typically, successors have become excellent managers – effectively allocating resources, driving productivity, and adroitly responding to day-to-day demands. However, the role of manager is often one of reacting to issues as they arise and then developing tactics to address them. Leaders, on the other hand, need to think strategically. They need to develop strategies that address problems, rather than to develop tactics that address symptoms.

The reality here is that “solving” a symptom (instead of the underlying problem) usually leads to the creation of more challenges. Additionally, addressing a symptom is simply a band-aid. The problem never goes away. The key to developing a great strategy is to spend time identifying the real problem. A successor needs to learn how to dig deep enough into a situation to uncover the problem. Only by accurately identifying a problem can an effective strategy be developed.

An owner (or a competent executive coach) needs to mentor a successor in how to uncover problems and create sound strategies. This process will help a successor develop critical thinking, sound judgment, and strategic thinking – all required to successfully take a company into the future.

By grooming a successor beyond the mechanics of a business, an owner will increase the likelihood of business continuity, and ensure future cash flow and profitability.

If you’d like help assessing and developing a successor, give us a call. We offer assessments and executive coaching – all designed to help successors succeed. In addition, we work with owners to strategize on how they can best mentor their successor.

How to Ensure a Smooth Succession

All leaders must be good at interpersonal and communication skills, along with good decision making and being highly productive. But the person at the helm – guiding the organization into the future – needs additional, essential competencies.

In order to be successful at running and growing a company, the head of a company needs to be able to develop a vision for the future, must be able to develop effective and meaningful strategies, and must have the ability to influence an organization.

Vision and Foresight
For a leader to guide a company, it is essential to possess the ability to develop a vision for the organization. A vision imagines a future which is better, different, and/or larger than the current state. Without vision, a leader will simply continue to execute the existing business model, often getting left behind as the economy shifts, customer/client preferences change, and competitors adapt. When a leader has and shares their vision, he or she helps others understand the organization’s direction and aspirations, and inspires the organization to improve.

The ability to develop vision can’t be learned from a book. It arises from within and it requires a leader to have passion and purpose for what they do. A passionless leader can only develop goals – which are uninspiring by their nature. If a leader wants to engage his or her organization, he or she must create a future that causes people to aspire to improve.

Strategic Thinking
The ability to think strategically is essential for leaders guiding an organization. Development of a proper strategy allows a leader to prepare an organization for faster growth and profitability. Without an understanding of what a strategy is and how to develop one, leaders will often focus on goals and tactics. In the absence of a true strategy, these goals and tactics are often misguided and usually result in new challenges arising. A misguided strategy can even cause a decline in growth and profitability.

A good strategy addresses an issue or problem and provides a direction for the company. By developing a true strategy, excellent results can be achieved and the desired financial goals realized. In order for leaders to develop a good strategy, they need to uncover what the underlying problem is and not react to the symptoms it causes. A strategy which addresses a symptom always creates more issues.

Influence and Persuasion
Influence is the ability to change people’s perspectives and beliefs. An influential leader has the ability to sell his or her ideas and get buy-in throughout the organization. Without buy-in, a leader simply gets compliance. But compliance is not the same as commitment. The results gained from the efforts of people who are only doing what is asked of them are very different from the results achieved by people who are enthused and committed.

The art of persuasion – our ability to persuade people to see our perspective – relies on our ability to understand the other person’s motivations and perspectives. Once we understand why they see things the way they do, we can then offer a new view of the situation – one which resonates with the other person.

A good place to start is with our free Successor Readiness Questionnaire. It can give you a sense of how ready your successor is to take over.

But the three essential leadership competencies discussed above don’t come naturally to most people. They need to be nurtured and honed. Blind Spots need to be revealed. Limiting beliefs need to be set aside and replaced with stronger, more expansive beliefs. Outside perspective and an unbiased sounding board are usually required.

An Executive Coach offers all that and more. Leadership skills aren’t trained – they’re developed over time. Utilizing the expertise of an experienced executive coach is the perfect solution for grooming an executive for the next level of leadership. Please let us know if we can help you reach your succession goals.