The Next Generation of Your Business

Many business owners mistakenly believe that succession means finding one strong candidate to take over the role of the retiring leader. Unfortunately, this narrow view often leads to a lack of adequate planning and preparation. True succession planning is about planning for the long-term success of the business, and for a transition that meets both the needs of the retiring leader and the needs of all who work for the business. If a business follows these six vital steps, both the business and the owners will benefit from a more robust process that can ensure the long-term survival of the company.

1. Develop a clear transition/exit strategy for the current leader(s).

The last thing we want to see is the next generation becoming frustrated enough to leave because the older generation simply won’t make room to allow for new ideas, a sense of personal responsibility and impact, as well as opportunities to act autonomously enough to manage risk and learn on the job. As the current leader, make sure that you are prepared to move over enough to make room for others. Consider learning about how a mentor or coach can provide learning opportunities for the newer leaders by sharing information and examples, without continuing to take all the responsibility. Some business owners feel guilty when they want to sell the business. However, this can be a sign of having built a strong and salable asset. And, it is also important that you provide for your own financial needs as you get older.

2. Develop an agreed governance process for the business.

One of the areas of greatest conflict in closely held businesses is how the business—and the family working in the business—will be managed. Successful family-owned businesses work hard to gain agreement and clarity regarding family governance. This usually includes a document that answers the following questions:

• What are the leadership roles in the business?
• How will we choose our leaders? What are the skills and competencies required to be a leader?
• How will we transition ownership of the stock? What kind of stockholders will get to make decisions? Do you have to work in the business to own stock?
• If a family member wants to become an employee of the business, what do they need to do to earn that right?
• How will family members be treated in the business? How will they be compensated and/or earn titles in the business?
• What will we do if a family member is not performing?
• How will we make decisions for the business? When is a decision a leadership decision and when is it a shareholder decision?
• How do we protect the business if something terrible happens to an owner? What kind of insurance or other protection do we need?
• What do we want to do with the business some day? Keep it in the family? Build it to sell?

There may be more questions for your business, but these tend to cause the most confusion and conflict.

3. Identify ways to continue to build the value of the business while the transition is in progress.

In many cases, as the current leaders get older, they stop investing in the business. This may be seen through a lack of investment in technology, highly trained employees, capital improvements, etc. So, just at the time when the business really needs to be stable, profitable and growing, the value begins to drop. It is important that a plan is in place to continue to strengthen and grow the business, maintaining the competitive edge and driving profit to the bottom line. This will provide both the current owners and the future leaders with more options. A profitable business, while not always easier to sell, is certainly more likely to provide an excellent return on investment for the owners. A stable and growing company gives the new leaders a chance to work with a high-potential business and build upon those successes, rather than having to spend their time in a turnaround situation.

4. Develop a process for ensuring that the tasks associated with business growth and governance are actually undertaken.

It is common for business owners to start a transition process with great intentions, but little action. Once a plan is developed, ensure that specific tasks are assigned to individuals to undertake, with dates identified for completion. One technique is to set meeting dates with professional advisors, such as your estate planning attorney, financial planner, etc., and commit to having information ready for each meeting. In addition, the strategic goals for growing the business should have responsible individuals identified, and the plan should be reviewed regularly.

5. Develop the next generation of leaders.

Everyone who has ever started and grown a business realizes that learning how to lead doesn’t happen quickly. First, identify your potential leaders, and include both family members and nonfamily members. You might consider the desired skills and attributes that you want in a leader, such as integrity, strong work ethic, clear communication, results-driven, positive role model, thoughtful decision making, follow-through and good organizational skills. Provide potential leaders with opportunities to undertake specific projects or tasks that will hone their leadership skills. This will also provide an opportunity to mentor or coach this emerging leader, in a way that allows them to both learn new skills and learn from their mistakes. Gradually increase the level of responsibility and impact of their role/tasks. Provide constructive feedback and reinforcement for a job well done. Choose a specific leader based upon merit, not bloodline.

6. Develop an agreed-upon method for transitioning ownership and responsibility to the next generation.

Be clear with both your family and your leadership team regarding your plans for the future. Let them know whether you are planning to transition quickly or gradually, or at all. Have a clear picture for the future leadership and ownership of the company and share this with the people at the top of the organization, and then with the rest of the company as the transition becomes imminent. If you decide to gradually step away, then develop a list of your tasks and areas of responsibility, and don’t overstep those boundaries. If you are leaving more quickly, then make sure that your leadership team knows how the company will be run, who will be making the decisions and what the future of the organization will look like. Remember, your team members will need to make their own decisions about whether or not they will fit into this company in the future, and you want to make sure that you have time to adjust if they decide that they don’t. A true succession plan pays attention to all these moving parts and ensures that the company and the leadership team are in the strongest possible position as this significant change transpires. If done thoughtfully and correctly, businesses can successfully change hands, with little impact to the company, the customers and the employees. In the end, as the next generation of leaders steps up, we want more of these businesses to survive and thrive.