MPowerment Matters

Succession Planning

June 2007

Succession planning is a subject that is of great importance for organizations of every size. For smaller, privately held companies the emphasis is on figuring out who is going to succeed the owner. In larger and publicly held companies, the emphasis is always on the development of leaders to keep the organization going strong, innovating and changing to stay ahead of the curve. Both cases involve looking to the future and then charting a path toward it.

The owner/operator needs to be thinking about an exit strategy from almost day one. The future arrives quickly, and having a sense of what one wants the future to be, helps paint the picture of who can make that happen. Growing the business in one direction opens up one set of opportunities. Growing it in another creates some different options. Knowing what the possibilities are lets an owner create a succession plan. Whoever ends up purchasing is going to be relying on a quality infrastructure, which includes quality people. The owner has to have a development plan for his people to make sure that when he leaves they can manage and lead; and he has to make sure that whoever he sells to has the qualities needed.

Succession planning as an exit strategy offers several different exits. They are (1) sell to family members in the business; (2) sell to employees; (3) sell to an external party; (4) go public and cash out; (5) close the business. The last option is not usually one that is planned for, although it could be. A business that owns a lot of real estate purchased at a much lower than current market price might be worth less as a going business than its assets might bring at sale.

Whichever of the other four options are chosen, it is important for the owner to make certain that the purchasing party has what it takes to run the business; or that the competencies already exist in the other people in the business. It is rare to sell a business for cash these days, and so a seller taking back paper has to trust that those operating the business will be successful so that he can get paid the balance of the sale price.

In a family business, where it is expected that the business will remain in the family for another generation, it is critical that management develops those coming up so that they can be successful. That means sharing information, giving opportunities to learn, develop and make decisions and having a plan to gradually step aside, allowing the next group to gradually step in. Further, since the business is most likely going to provide the cash for the transaction, both generations have to have a well thought-out financial plan.

The same can be said for sales to employees not family members. The owner should be thinking in advance of his anticipated retirement date-10 years, 15 years, whatever. He then has that period of time to train and develop the employees, carefully culling through them and polishing those with the talent, the competencies and the drive to lead and to take the business to the next level. Those people should be brought along carefully, nurtured and taught. They should be tested in the area of financial management, because their ability in that area will be extremely important to the owner as seller.

Selling to an external party actually represents several quite different options. An external party can be a big company doing a "roll-up" in the particular industry, with a proven track record. It can be an individual looking for her first entrepreneurial opportunity; or it can be a downsized executive looking to get back in the game. Again, sellers need to gauge the qualities and competencies that the purchaser brings to the table.

Part of a leader's legacy is the quality of what she leaves behind her. If the organization is just as strong or stronger after she leaves, she has done her job well.

In large, public companies, succession planning is a critical competency that must exist within leadership and throughout the company. Robert Fulmer and Jay Conger, in their book "Growing Your Company's Leaders", talk about a growing leadership shortage, and state that over the next 15 years we will need 30% more leaders than we have.

General Electric, under the leadership of Jack Welch and Jeffrey Imelt, has developed a first-rate succession plan. They begin looking for leaders at the lowest level of the corporation, and when they see glimmers, they push employees into development plans and give them every opportunity to move up the ladder.

A succession management plan is important to serve the needs of the organization by helping to provide a continuous supply of leadership material. It also serves the needs of employees by keeping them motivated and interested. When they have a chance to develop and be challenged, they are happier with their work and most likely to stay with the company.

In "The Leadership Pipeline", author Ram Charan defines succession planning as "perpetuating the enterprise by filling the pipeline with high-performing people to assure that every leadership level has an abundance of these performers to draw from, both now and in the future." Charan and his co-authors worry that CEOs do not invest enough time in development because they view jobs as "work to be done" and not as development assignments. He argues that this must change quickly.

Succession planning is a function of an organization's leadership. No matter what the size of the company, it needs to be focused on its future. Leaders need to begin preparing for their ultimate departure and replacing themselves with highly competent people. This will add to their legacy, and in many cases to their pocketbooks.