When is the last time you took time off for vacation? How long were you away? Who ran the show in your absence? In college my management professor said “You can tell of the quality of a manager by how long he can be away without being missed!” But the sad reality is that most managers cannot take time off because there is no one to “watch the shop” in their absence.
But this blog is not just about taking time off, but rather why a succession plan is important! It is important on many levels, but let’s look at two reasons for a plan.
1) What if there is an accident, health issue or other emergency where you cannot fulfill your duties as an Owner/CEO? and
2) Planning for an eventual Exit from the business.
Ask yourself the following questions:
1) What would happen to my business if I was forced to take a year off due to an accident or health issue?
2) Do you have a succession plan in this eventuality?
3) Are the personnel in place to execute this plan?
If not, you may need to evaluate your staff and look for the right person (people) to bring in. Getting this issue properly resolved can take a significant amount of time. You need to test and make sure it is the right person!
4) Is the plan documented?
A plan that is not documented is an idea, not an actionable plan.
5) Have you discussed the plan with the people identified to carry on the business and are they willing to take on the responsibility?
I am aware of a situation where a division manager was offered the opportunity to run the division for a new owner with increased remuneration and autonomy. However, the manager had different plans to acquire and operate his own small business. Not a good situation for the seller or the new owner.
6) Is there a contingency if the plan does not work, i.e. the successor fails?
Even the best of plans may fail in reality. Just like a battle plan changes after the first shot is fired, the chosen successor may fail. How do you measure their success or failure and what is the contingency plan that kicks in after some sequence of time and events?
7) Have you set the criteria for the qualities you want in your successor and does your chosen successor meet the criteria?
How do you plan to “train up” your planned successor? Investment in training, your time in mentoring, and other investment is key to their success and ultimately the company’s success. Look at it this way, if you think the cost of investment is high, what is the cost of failure?
8) Have you given your successor a “test drive”?
How will you test and develop the necessary skills in your chosen successor? How will you give him the opportunity to fail with a safety net? Giving authority and testing capabilities will help assure a better succession if and when needed.
Events can happen unexpectedly and answering the above questions will help you determine what to do next to protect your business if the unexpected becomes an unfortunate reality.
Succession and Exiting your Business
But how does this relate to Exiting your business? Intrinsic value drivers reduce risk and increase the multiple a buyer is willing to pay for a company. Perhaps the key intrinsic value driver is a succession plan. That’s correct, knowing who will run the company in your absence is critical to the future success of the business. After all, that is what a purchaser is buying, the future! And they will pay more if there is more assurance the profitability will continue and grow, i.e. less risk.
So in addition to the questions above, also address the following:
1) How will I make sure my chosen successor will stay with the company?
Frequently referred to as “Golden Hand Cuffs” these incentives create rewards for the successor willing to stay and succeed. Properly structured, both your key employee(s) and the new owners will benefit from a successful transition?
2) What if the new owner does not want to keep my chosen successor?
This sometimes occurs. In that event the “Golden Hand Cuffs” reward key personnel for their faithful performance and willingness to stay of asked.
A properly planned and executed succession plan can save a business, add value to an Exit and give you the business owner peace of mind. So what are you waiting for? Call me if you need help in addressing this critical area. My next blog will address Family succession.