Businesses that want to secure their legacy, transition ownership, or increase their value for potential buyers must have effective succession planning. As businesses grow, a skilled middle management and executive leadership team is essential for ensuring continuity. This guide assists business owners looking to enhance their company's value, whether maximizing their value in an acquisition or planning for long-term business continuity. For further insights into increasing business value in general, refer to our E-Book entitled, "An Entrepreneur's Guide to Understanding Business Value."
Step 1: Charting the Course - Preparation
This step involves working backward from the vision of a successful succession plan and assessing what gaps need to be addressed to meet that vision. Here's how to approach this foundational step:
Identifying Primary and Secondary Goals: Common reasons and goals for succession planning include:
Ensuring business continuity: setting in place a succession plan allows a business to continue operating without involvement from owners, allowing existing owner-operators to take a more passive role.
Making the business appealing to potential acquirers: A well-executed succession plan highlights the company's stability independent of its owners, making it more attractive to investors and buyers.
Preserving the organization's legacy: ensure future leaders embody and continue to serve the company's core values and mission, upholding its established culture.
Assessing Leadership Gaps: Based on the goals identified above, evaluate what leadership is needed to execute the plan successfully. For example, an ACME company has a single executive overseeing marketing, sales, and business development. While this makes sense in the early stages of a company's growth, splitting those responsibilities into separate roles at scale may make more sense. Marketing can drive new, top-of-funnel leads, while a sales leader can focus on qualifying and converting MQLs (marketing-qualified leads) into prospects. Business development, freed from executing day-to-day marketing, can concentrate on partnerships or distribution channels that require longer-term relationships.
Another common gap in leadership as businesses scale is the separation of "finance" from "accounting." A great accounting/controller ensures the streamlining of AP, AR, and other working capital workflows, while strategic finance is necessary to explore growth opportunities, evaluate unit economics, areas for cost containment or areas in the business to deploy capital (“capital allocation”).
Identifying Future Leaders: Identify individuals who can lead the company without current ownership. People analytics and psychometric tests can help reveal those with leadership potential, aligning leaders' skills with the company's direction. An individual's track record and growth trajectory often indicate high leadership potential. In the absence of internal talent, consider hiring an outside firm to recruit for senior leadership positions externally.
Step 2: Laying the Foundation: Transition Plans & Incentives
A clear transition plan sets the stage for business owners to step out and new management to step in, whether aiming for business continuity or preparing a business for sale. Understanding the motivations of key team members and implementing structured incentive programs are steps toward a smooth transition.
Developing Leadership Pathways:
Developing clear pathways for internal and external talent is recommended to bridge the identified leadership gaps. Internally, this entails implementing mentorship programs, advanced leadership training, and staffing cross-functional projects to immerse leaders within the business, equipping them with the necessary skills to overcome future challenges and drive the company forward. Externally, the focus should be on searching for candidates with specialized skills or knowledge that can introduce new perspectives into the organization. These candidates could be ideal for fulfilling or delivering new services or turning around an underperforming organization.
The owner delegates more responsibility, creating space for new leadership.
In leadership transition, the "Four Es" framework can guide owners in effectively delegating responsibilities. It entails Experience by assigning challenging roles to develop emerging leaders' skills; Exposure through mentorship and networking opportunities; Expectations by linking achievements to rewards; and Education to encourage innovative thinking with diverse learning opportunities. This method prepares future leaders for an orderly transition and handover of responsibilities.
Aligning Long-Term Interests through Incentives:
As the owner steps back from day-to-day operations, ensuring new leadership's incentives align with owners' incentives will help ensure growth and protect ownership value. In addition to offering competitive salaries, align incentives with performance-based bonuses, stock options, or stock grants. In addition, longer-term alignment better defines decision-making involvement from the new operators (who makes capital allocation decisions, key hires, etc).
Step 3: Orchestrating Success: Communicating and Executing the Succession Plan
Achieving success when implementing a succession plan depends on clear communication and execution, with clear definitions of what "success" looks like. Having metrics or milestones in place helps ensure everyone's standards.
Mastering Succession Dialogue
Involves transparently discussing the transition plan with key stakeholders. It's important to frame the succession as an opportunity for growth and development rather than a negative disruption. Whether it's for future acquisition or helping the owner-operator step back from the day-to-day, communicating expectations to the executive and management team ensures alignment and buy-in from the executive and management team.
New Management Evaluation:
When transitioning into senior management, business owners should focus on certain qualities like curiosity, courage, confidence, and communication skills, which are also known as the 4C's. They should also ensure that the right people are placed in the right positions and conduct a listening tour to improve communication. Identifying high-potential individuals is important for developing a strong leadership pipeline. For instance, sales managers who are being considered for sales director or VP roles could lead meetings and small teams of other managers. By valuing team input and aligning team efforts with the company's objectives and values, future leaders can build trust, enhance collaboration, and improve organizational dynamics.
De-risking the Succession Process:
Implement a 'succession pilot phase' where potential leaders gain temporary leadership roles to test their readiness. Providing alternative growth paths for high-performing individual contributors who may need more time to be ready for greater leadership positions ensures stability and talent retention with backup leadership plans in place.
Step 4: Going Beyond Succession Planning
Beyond just executing the plan, succession is about thinking long-term, using new ideas to make the business stronger and more appealing, and staying flexible for market conditions.
Redefining Through Succession:
Succession planning is more than just replacing leaders; it's a chance to change how the business moves forward. Bringing in new leaders helps a company stay modern and competitive, introducing fresh ideas for growth. It shows forward-thinking, preparing for future challenges, and dedication to keep improving and staying relevant.
The Continuous Succession Journey:
Succession planning is an ongoing process and may be challenging initially. For instance, if a new leader's approach clashes with the company's culture, it can lead to team conflicts. To resolve such issues, companies can provide leadership training or define goals for smoother integration. Moreover, shifts in market trends or internal problems may require adjustments to the succession plan. Take the case of a healthcare provider losing patients due to a delay in adopting online booking and telehealth. By revising their succession plan to include leaders proficient in digital health, the provider can regain patients and enhance online services. This highlights the importance of a flexible succession plan to tackle immediate obstacles and prepare for future developments, ensuring the organization remains resilient and proactive.
Conclusion
Succession planning smooths the process of changing leadership, makes businesses more appealing to potential buyers, and ensures business continuity in the absence of an owner-operator. It involves setting the groundwork for successful leadership shifts, preparing the next generation of leaders, and providing rewards to retain top talent. Clear communication, involving stakeholders, and frequent review of the plan are crucial components. New leadership can spark innovation, improve financial outcomes, and increase the business's value for its owners.