succession

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 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.

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.

3 Strategies to Reduce Your Successor’s Dependence on You

In order to succeed, a successor must possess a strong set of leadership competencies, he or she must stop certain behaviors and adopt other behaviors, and they must be able to function well without the oversight of you, the outgoing owner. Although most owners feel they’ve done a decent job preparing their successor to take over running the company, the truth is that about 70% of successions fail! It takes more than a knowledge of the business (production, service, sales, finances) to effectively lead a company into the future. Here are three of the strategies you can use to groom your successor to reduce or eliminate their dependence on you.

Allow them to make decisions and possibly fail

Two critical competencies a successful owner must possess are good business judgment and the ability to think strategically. While these competencies come naturally to some, most people need to develop their judgment and their ability to think strategically.

Good judgment comes from our ability to recognize when our emotions and biases cloud decision-making. When we allow emotions to cloud our judgment, we make decisions that are misguided. Having sound judgment – unbiased by emotions – allows an owner to make good business decisions. Strategic thinking comes from our ability to distinguish between symptoms and problems. Reacting to symptoms leads to using tactics that create new problems. Developing a strategy that addresses the real problem resolves the problem.

The most effective way to develop judgment and strategic thinking in your successor is to allow them to make decisions on their own with your guidance. And it’s OK to let them make mistakes (as long as they’re not critical mistakes). After all, we learn more from our mistakes than we do from our successes. Start allowing your successor to make decisions and make mistakes so you can help correct their thinking, improve their judgment, and boost their self-confidence.

Share your past mistakes and the lessons you’ve learned

Another good way to help someone succeed as an owner is by mentoring them. Mentoring is about helping someone appreciate the mistakes you’ve made so they don’t make those same mistakes. You can share why you made the decisions you did, help them understand the negative consequences of those decisions, and teach the lessons you took away from them. Not all the lessons learned are self-evident, so by sharing your stories, you’ll keep your successor from making those same mistakes.

Reinforce the culture

Culture is made up of the values and behaviors an organization is known for. A good deal of a company’s success relies on its culture. The results obtained from a good strategy will be directly related to the strength of a company’s culture.

A culture of mistrust, lack of respect and a lack of accountability will yield weak results. Alternatively, a culture of high integrity, good communication, mutual respect and strong follow-through will yield superior results. Culture is developed over time and is defined by the values and behaviors the leadership tolerates. A successful successor appreciates the existing culture and will work to strengthen it rather than to change or undermine it.

Don’t be lulled into a false sense of comfort because your successor “knows” the business. Help him or her develop a complete set of leadership competencies, help them develop the appropriate set of behaviors, and help them become more independent and self-confident. It’s in your interest and in theirs.

If you’d like help in preparing your successor to take over running the company, please give us a call. We offer leadership assessments and executive coaching, all designed to help your successor succeed.