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How to Choose a Successor: Developing a Succession Plan
Despite whether the next CEO will be a family member or not, there are some critical steps that the business owner must take to ensure the endurance of the business. Sometimes, a founder decides to leave the business to his or her children in a manner that creates a group ownership situation. "If that is the wish of the current owner or owners, they must prepare the next generation to be good owners, regardless of who is selected to be the next CEO," Baskin says. Many owner-managed businesses don't have strategic plans beyond the knowledge and instincts of the founder. It is necessary to prepare the business for succession by making sure there that there are plans in place that the next leader can understand and use to build upon.
Writing a succession plan
According to Craig Aronoff, Steven McClure, and John Ward, authors of Family Business Succession: The Final Test of Greatness (Aronoff, McClure, and Ward, 2003), there are several distinct plans that need to be developed to ensure a successful transition:
- Business strategic plan -- This type of document provides an outline of the future path of the business and it allows each subsequent generation to add to it and perhaps alter the course.
- Family mission statement -- If ownership will be shared among family members, you need to lay out the policies and procedures for the role of family members in the business -- whether or not a family member maintains day-to-day management of the business.
- An owner's estate plan -- To avoid losing the business to the government by paying higher-than-needed estate taxes, you need to understand the tax implications of ownership transfer to make sure your estate winds up in the hands of your heirs.
- A succession plan -- This written document defines how succession will be carried out, when certain duties or authority turns over to the successor, how to fill gaps in experience or knowledge identified during the selection process, and spells out how to determine the successor is ready.
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It is important to make certain that everyone knows when the process of succession is complete. "Visibility is key in any small to mid-sized firm -- the clearer and more specific the plan the more likely it will succeed," Willett says. "Identifying a key successor is not something you want to have flying around the company rumor mill."
Communicate the succession decision
One of the best ways to ensure that the succession plan is a success is to communicate it to employees, family, partners, and customers. This is particularly important if the founder or business owner remains active while the transition is under way. "If the former CEO continues to serve as board chair or in some other role, it may be difficult to break long established communication patterns," Baskin says. "This cannot be accomplished with a memo or e-mail. Meetings with key executives and external constituents need to be arranged to reinforce their understanding of the change in leadership."
It's important for the succession plan to be written down. Discuss with your advisors who you should share this document with, such as other owners, business partners, or family members. "If it hasn't been articulated and written down and if you don't understand it well enough yourself to put down in writing, then you don't understand what is supposed to happen," Worthington says. "A written succession plan may start with a napkin at Chili's over lunch but it has to morph into a formal document that includes buy-sell agreements. You could get awfully complicated with it. But the more detail there is the less uncertainty."
Detail evolving leadership roles for the founder and successor
One goal of a succession process should be to make the changeover a non-event in the eyes of key stakeholders. Worthington says he often cites the succession plan of General Electric, when former CEO Jack Welch stepped down, as a model of success -- even to family businesses. The company had been open about the selection process with employees, stockholders, and the public. "When he did retire, no one was shocked," Worthington says. "Everyone knew what was happening. The goal should be a flat line in business operations. There is a transition involved but not really a shock to the business."
The best process is one that seems natural and is expected by everyone involved, Baskin says. "This is best accomplished by gradually shifting decision-making and authority from the current leader to the next, allowing both leaders the opportunity to adjust to their new roles," he adds.
Make a plan for organizational succession
The organization itself may need to change with the appointment of a new leader. This is especially true when the transition is being made from the founder to the next generation of owner(s). "Governance and decision-making processes that were not needed when one owner-manager was running a business may need to be developed to guide the roles and safeguard the rights of the new leader and owners," Baskin says.
Remember that there may be bumps in the path to a smooth succession. "It isn't easy for the founder or entrepreneur to hand the mantle of leadership over and let go of their controlling interest in ownership," Schoen says. Ownership of the firm doesn't typically transfer at the same time leadership transfers. "You're going to see a delay there," he added. "Typically the older generation wants to see how the new folks do before they give them all the keys to the company."
