Succession Planning

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.

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 us. Our conversation can help determine the preparedness of your successor and whether our services would be a benefit to you.

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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.

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.