How to Choose a Successor
Are you dragging your feet when it comes to creating a succession plan? You shouldn't. Here's how to get started choosing (and training) your replacement.
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Practically as soon as a small or mid-sized business is successful enough to have a future, the business owners needs to start thinking about developing a plan for who will succeed them. In a public corporation, the board of directors has a fiduciary duty to the shareholders to develop and implement a succession plan. In a privately-held company, the business owner has the responsibility to think beyond him/herself and provide a succession plan for the benefit of employees, family, customers, and supplies. The planning may encompass who will take over the event of an untimely death or disability, the loss of a key employee, or when the owner no longer wants to be in charge.
"If this is such a crucial element of good business planning that it requires the attention of the boards of the world's largest companies, it is no less important for a small privately owned business where the 'bench' usually isn't very deep," says Otis W. Baskin, business professor at the Graziadio School at Pepperdine University and an associate of the Family Business Consulting Group, Inc. "Yet, it is quite possibly the last thing most owner-managers want to face."
The process can be more difficult for a small or mid-sized business because succession deals not only with management but ownership of the business, and ownership is usually in the hands of one person, a family or a partnership. Decisions to be made by the owners of private businesses fall into three general areas: sell, pass ownership and management of the business along to heirs, or let the family retain ownership but not management. These can often become complicated because of the involvement of different family members and their sometimes differing views of what is best. But there's no denying that keeping a business in the family can often yield more wealth for generations to come than any investments purchased from the sale of the business. When owners decide that preserving a successful business for future generations would be the best legacy they could leave behind, they need to begin the process of choosing a successor.
The following pages will cover how to choose who should succeed you, how to develop a succession plan to communicate that decision, and how to help pave the way for your successor to be successful.
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There are all sorts of issues to consider when addressing the question of succession in your business: timing of the transition of power, the problem of who should succeed you and whether that will spark disputes in your family, and the matter of how you can best help the succession proceed smoothly. Various family business studies estimate that only 30 percent survive the transition from first- too second-generation ownership. Of those that do, less than half make it to the third generation. That's why one of your first orders of business is to understand your goals in succession planning.
"The goal is to keep operations running as smoothly as possible if the unexpected should happen and a key player is either no longer available or no longer able to perform," says Laura Willett, senior lecturer of finance at Bentley University and a small business consultant. "It's a bit like a professional sports team -- if we lost our key player how would the team continue to win? It's a matter of identifying a point person who could pick up the ball and run with it."
Start by answering the question: for whom or what positions in your business do you need a succession plan? No individual is indispensible (including the firm's founder) and given that anything can happen it's always best to have a plan laid out for who will cover the senior person or persons within a firm. In a smaller firm, personality is always a factor, Willett says, but the skills and/or key functions should be the guide in succession planning. If you were to lose the one person who could perform a specific critical function in the firm would this hamper "normal operations" -- if the answer is yes, prepare a plan to cover that person.
Selecting a succession target date
The goal of good succession planning should be to create a process, not an event, Baskin says. "Choosing a successor without a commitment to a target date is a common mistake," he says. "It will be difficult to keep a qualified successor, even if he or she is a family member, in place long without a timeline. Developing a plan to select a successor and a plan to implement the succession does not require a specific date for the event. Rather, a series of milestones leading to readiness for succession is usually best."
In selecting milestones and target dates, Willett says it is important to consider how complex your business and/or industry is. In addition, she says that you need to factor in how long it will take for the owner or senior manager to be comfortable with the transition. "The more complex the business the longer it will take for full understanding. Again, this is a bit of a balancing act," Willett says. "Making the dates too far out can discourage everyone involved. Generally letting any one milestone go beyond a year is going to reduce the effectiveness of the plan. If a target will take multiple years to complete, it's better to break it down into smaller, more manageable tasks."
How to pick a successor
In some businesses, it's a no-brainer to pick the right successor. It may be that there is only one family member who took a shine to the family business. Or perhaps it's someone from outside the family who has worked in the business and demonstrated the skills and personality to best lead the business into the future. But, oftentimes, succession is a much more difficult issue for businesses.
A lot of those difficulties stem from the fact that small businesses are often dealing with families in succession planning -- and not all family members agree where money is concerned.
"A lot of family-owned businesses use the business as a tool to train the next generation," says Bill Worthington, assistant professor of management and entrepreneurship at Baylor University, who has researched family businesses and was brought up in a family that owned a waterproofing business and struggled with succession issues. "In our story, as is very typical, there was a certain heir apparent but that didn't work out. And then there was another but there was a death in the family. I thought we were unique but these little soap opera stories apparently are quite typical."
A good succession plan should include criteria for the successor that reflect the needs of the business in the future. "If you're the current leader, avoid the temptation to 'clone' yourself," Baskin says. "It is critical to realize that your successor cannot lead the business just like you. Look for the right person to build upon what you have done and take it to new heights, not preserve your memory."
If more than one candidate has been identified as a potential leader, a sub-committee of the board or a group of trusted advisors can be asked to make a recommendation, Baskin says. This may be done over some specified period of time to allow the committee to observe each person in action if they are not already familiar with their work.
John Schoen, an adjunct management professor at Baylor who has done research with Worthington, says that even if the family remains as the controlling owners of a business, the successor to manage the firm doesn't necessarily have to be a member of the family. "In some instances, a non-family successor is better either in the short run or the long run," he says. "The family members may not possess the right qualities to run the business."
There is help for family-owned businesses in helping to develop succession strategies and plans. Businesses considering succession should consult with attorneys, accountants, and tax planners who specialize in family business succession to understand all the implications and get advice about choosing successors, Worthington says. The Family Firm Institute, a global non-profit think tank for advice and research into family business and the family wealth field, is also a resource for information, as its members consult with small businesses regarding the legal, financial, and tax implications of succession in businesses.
