The Boomer generation is aging and leaving the workplace fast. According to the U.S. Department of Commerce between 2011-2029, 10,000 Americans a day will turn 65. As a result, conversations about succession planning are happening more frequently. However, it’s one of those topics that is often just talked about then put on the back burner. Whether you are a business owner, entrepreneur or board member, a succession plan is a key piece of the puzzle to ensure the health and longevity of your business. To be truly effective, that “piece” must be developed early on.
Ram Charan states in the Harvard Business Review that the “CEO succession process is broken…The problem isn’t just that CEOs are being replaced, it’s that they are being replaced ‘badly.’” That is, inept CEOs not only affect the wellbeing of a company, they can also impede any succession strategies of the business.
Succession planning doesn’t just address individual positions within a company. It encompasses every aspect, and business owners must make plans. What happens when they are no longer at the helm? Should they hand off the business or sell it? Should the business be kept in the family or sold to a private equity group? Unfortunately, these questions are too often the last thing on a business owner’s mind. Successions take time. An internal step-down can take up to seven years to plan and develop properly, and a decision to sell can take even longer. Bottom line: plan early!
What options do you have?
Maybe you want to have a plan in place to replace C-level management. Or, you could have an exit plan in place where you transfer ownership to a family member or develop an internal candadate. Perhaps you’d rather outright sell the business. Options include:
Handoff to the next generation –This action sends the message that the business has been left in the hands of an internal executive who is committed and can ensure continued sustained success.
Selling to an outside party – A good choice if capital gain is the primary goal. But bear in mind that it can take years to ready a company for sale at a competitive price.
Management Buy Out (MBO) – When the management team already has the skills, strategic knowledge and experience to run the business.
Public Offering – By going “public,” corporate shares are offered to the general public and traded on the stock market. This requires a strong business plan and is best when the CEO is going to remain active in the company.
Employee Ownership – Employees are motivated to strive for the success of the company. Consider an ESOP (Employee Stock Ownership Plan) where the business owner sells shares to an EOP trust, which in turn makes annual contributions to the accounts of the employees.
Private Equity Group –These groups invest in companies with the ultimate plan of selling its stake a few years down the road for a substantial profit.
Plan early and plan right
A successful succession plan requires preparation and planning. And it’s never too early to start. Regardless of what plan you choose, all sales prospects will be interested in what kind of leader you are. According to a CEO Magazine survey, these are the most valued characteristics:
1. Strategic thinking
3. Decision Making
4. Technical Competence/Expertise
5. Team Work
Strive to embody the above qualities when preparing and subsequently introducing your company’s succession plan. To that end, I suggest the following actions:
1. Make developing your leadership pipeline a business priority and fund it.
2. Develop a succession planning team with at least one outside expert.
3. Outline the current and future structure of the company. Identify all critical positions and detail core competencies.
4. Outline the core responsibilities for all key positions.
5. Assess your current talent for future key positions.
6. Determine what positions should be filled internally or filled from outside sources.
7. Create an action plan to follow and to measure success. Insist on individual development plans for all key leaders. Leverage executive coaching.
8. Review your plan and its effectiveness. Put it into action.
Leadership succession: Lessons from the best companies
What if your plan is leadership succession instead of a sale or a hand-off? Three success stories:
McDonald’s: When McDonald’s CEO Jim Cantalupo suddenly died, McDonald’s showed how an organized company works by bringing Charlie Bell into that position within hours. (Harvard Business Review)
Apple: CEO and founder Steve Jobs planned his succession for years, and built a large library of instructional and multi-media materials to help continue his legacy. Tim Cook, his successor, was also groomed for many years. (Bersin by Deloitte)
McCormick: Robert Lawless made succession planning an integral part of his job before turning over the CEO reins to Alan Wilson. He just stepped aside after 11 years in favor of a successor who had been groomed for five years. (Bloomberg Business)
Develop internally vs. outsiders
Make sure your master plan include lateral moves, special projects, executive coaching, assessments, 360 feedback, new development opportunities. Managers will remain motivated and engaged when they can see you are invested in their continued growth and development.
A 2014 Stanford Business report on succession planning makes these recommendations:
1. Map the future operating and leadership skills required of each executive position and benchmark executives against these skills.
2. Know that the organization and its strategy are constantly evolving and the skills needed are bound to change with time.
3. Become comprehensive and treat succession as a continuous practice – prepare for transition at any moment.
4. Assign ownership and rules and give primary responsibility to an independent chairman or experienced outside director.
5. Connect CEO and senior executive succession plans with coaching and internal talent development.
6. Assign coaches and mentors. These professional third-party coaches bring an outside perspective and degree of objectivity to the development process.
7. Get strategic assistance when necessary. Survey the practices of other companies and integrate the ones that are best suited to your needs.
Whether you foresee selling your business, arranging for employee ownership or promoting and developing talent from within, it is incumbent upon every management team to have a succession plan in place. Keep in mind that your business will certainly change over the years, losing key employees—and gaining others. Plan to have opportunities for promotion to guarantee seamless succession and success. Having the right people in the right positions will make your business more attractive in any succession plan. Who knows what the future holds? Being prepared is always the best answer. How robust is the individual development plan for your top two successors?
If the future financial value of your company is important, why wouldn’t you have a well designed plan?