Back in 2011 we wrote a blog on succession planning that referenced our feedback from over 500 private enterprises we had been in contact with. Seven years later and that number is closer to 1,000 discussions, but we are still referencing the same article. Our findings have not changed much in this period, so here is a reboot of one of our most popular articles – because succession planning is important to all of us.
Whilst most business owners acknowledge that succession planning for their business is critical, when we ask them to define what it is and how they might do it, very few can give a clear answer or process.
Of all the businesses we talk to, less than 30% have said they have a business succession plan in place – and the majority still relate succession to a sale or exit strategy.
In a people and performance context, succession planning is really about planning for the continuation of a business through the skills, development and motivation of capable people. It applies whatever your stage of development – start-up, growth, maturity or exit.
Put another way, it is about managing energy – that of the business owners, employees and the business itself.
When discussing succession plans with clients, we talk about 3 layers of succession that should be considered:
As with all business processes, succession should be guided by a clear purpose and strategy for the business (and its owners). Strategic succession looks at ownership and control issues including valuation methodology, equity transfer and an ultimate exit plan.
It should consider the owners’ personal objectives (including family and lifestyle needs), timeframes, legacy issues as well as an open dialogue around blocks to change.
This process requires a high degree of self analysis and awareness and should cover all the other emotional issues that impact on the business. This is often a sticking point for owners (and their business advisers) when there are multiple stakeholders involved. Without a framework and facilitation process to deal with these issues, many plans will falter at this stage and never be finalised.
For those owners who get past the self analysis and awareness stage, gap analysis and what if scenarios need to be addressed.
At this stage clients should develop a defined ICE Matrix, that outlines the alternate Income, Control and Equity structures (and trade-offs) for the business as it experiences a range of scenarios.
The ICE Matrix and scenario plan should form the base of a formal shareholder or partnership agreement.
Operational succession involves the recruitment, assessment, management, motivation and development of capable people.
Owners need to manage the expectations and energy of their people, in particular the rising stars within the business who may be potential owners, as part of an internal sell-down or Management Buy-out (MBO) strategy alternative.
Creating a quality team of people not only adds exit options for the business, but increases equity value by adding extra depth to functional areas, minimising key man risks and freeing up owners to work on strategic initiatives.
Owners need to create an effective high performance framework that should incorporate the following tools:
Whilst most of these tools are not uncommon within organisations, we have found that less than 3% of the firms initially surveyed have Career Maps in place.
A Career Map acts as a visual ‘pathway’ that summarises the behaviour, skills and performance expectations for each position in the business, as well as the functions and responsibilities that people will need to take on as they progress towards a leadership or ownership position. It should also include likely timeframes and clear KPI’s.
Career Maps should be a base document in any human capital plan and are integral to recruitment, induction, personal review, SWOT analysis and training processes.
Of course, not everyone wants or needs to lead or own a business, so it is also important to include alternate pathways and cap-out options for valuable people.
For those who are selected for potential ownership, owners should work through an ICE matrix with them and explain how they can acquire equity, in what timeframes (may be a progressive sell down), how this impacts on their income structure and what level of control / decision making they are entitled to – as well as the associated risks and responsibilities of owning a business.
For many companies, potential owners will move through a profit share phase first, before equity transfer (which can often mean a forfeiture of profit share entitlements).
Most business owners will think of key man and income protection insurances as the primary method of crisis succession planning – and with good reason. It is critical to protect the business and family members of key people in the event of death or disability.
There are also a range of other business and liability insurances that are typically covered in a business risk management plan, including interruption or continuance cover.
However, one of the things that is nearly always overlooked in crisis planning is how to manage the energy of employees, clients and other key stakeholders in a crisis event. This can extend from handing over key relationships if an owner is incapacitated, through to a communication and relocation plan if your offices are destroyed by fire (and everything in between).
It is difficult to consider every risk event, but the key is to run scenario plans and have a crisis recovery mindset that can be applied to most situations – and to communicate this to your people in advance.
Even when business owners develop an understanding of the 3 core areas of succession planning and their associated processes, they still find it hard to implement. The major blocks include (but are not limited to):
A skilled adviser needs to understand these blocks and be at their best during implementation, to ensure any plans do not falter at this stage.
The outcomes of not getting it right are unpleasant. Typically, we see owners burn out and succumb to the pressure of not being able to effectively ‘share the load’. This is usually accompanied by a corresponding decrease in the equity and goodwill value of their business, associated to key man risks.
A vast majority of business owners sell because they hit a wall in their growth curve – financially, emotionally or both. They take a view they have limited exit options and as a result either sell to an external party or (usually worse) ‘merge’ with another business that is often in the same situation.
Effective succession results in less stress, higher profitability, improved culture, a continuation mindset and ultimately a greater range of exit options at a higher price!
It’s worth getting right.
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