Business Succession Planning, Part 2—How to select and groom a successor
If building a succession plan is one of the most important business considerations for entrepreneurs, the question of who takes the reins is a close second.
That’s particularly relevant for business owners who hope to pass their business to one, or more, family members. As I highlighted in my last post, a 2006 report by the Canadian Federation of Independent Business found that 52 per cent of SMEs lack a formal succession plan. Based on 30 years of experience working with entrepreneurs, I would estimate that far fewer have a clear process in mind for choosing the family member who might eventually replace them.
This lack of planning poses a major risk to an organization’s successful succession, one that only increases when family members are involved. Why? Put simply, if a business deal goes sour—let’s say an agreement to sell your business to another entrepreneur—both parties can part ways and either duke it out in court to resolve the matter, or simply walk away with feelings and egos bruised. The matter becomes far more complicated when family is involved, particularly when one member is chosen to run the business over another. In that case, hard feelings can destroy relationships, potentially result in a legal battle and cripple the organization—not to mention creating an irreparable rift in the family.
That’s why being proactive and setting out a customized process for choosing your successor is critical. The process of selecting and grooming your successor entails more than simply choosing your preferred—or most business savvy—family member. It should involve setting out and communicating a process for identifying the right candidates. Make your family aware that your successor will be the person best qualified for the job based on measurable criteria for assessing their skill set and suitability to manage your business. The criteria can range from education to professional experience, but should also include a nod to their cultural fit—or lack thereof—within your organization.
Our preferred approach is to help clients develop an objective scorecard they can use to rank candidates based on those aforementioned criteria, preferably with the help of a selection committee comprised of individuals such as trusted advisors (perhaps a long-time lawyer or accountant), independent investors, members of your advisory board (if you have one) or even fellow business owners who have no direct attachment to the business or its potential successors. Inviting that level of unbiased input will help make the decision-making process more efficient, effective and emotion-less.
But that’s only the beginning. Follow these 10 steps to selecting and grooming a successor and rest assured that your business will (eventually) pass into the right hands:
Develop a leadership profile—Here are just a handful of the critical questions you need to ask when developing a profile for your eventual successor: Who might be the ideal candidate to take over the business? What experience and expertise will he/she have? What kind of leadership style will they demonstrate? What strategies will they employ when under pressure when facing internal and/or external pressures? What’s their vision for the business?
Identify suitable candidates—This is a major stumbling block for many business owners who assume that all of their children/nieces/nephews/cousins (you name the category of family member) are potential successors. Nothing could be further from the truth. Some family members may not even want to be considered for the position, let alone be an appropriate fit. Narrow your search to a short list of three potential successors, or less, and begin the vetting process. Remember that potential candidates may even be found outside the family. Often times it can be a long-time senior level employee from within, or someone outside with industry experience, or even from a completely different industry sector.
Identify gaps in skills and experience—Not all of these candidates will possess the skills and experience you need, and that’s OK. The main objective at this stage is to determine which family members have the necessary skills in order to make a fair, apples-to-apples comparison.
Evaluate the successor candidates—Use the scorecard I mentioned above to make an objective decision about your successor. Again, this evaluation should be conducted with the assistance of unbiased third parties who can help you see past relationships to focus on the needs of the business.
Choose your successor—Once that evaluation has occurred and the candidate scorecards are complete, it’s time to select your successor. This is an important step that shouldn’t be delayed. In fact, delaying might only lead to anxiousness and even animosity building across your family. The better approach is to make the decision quickly—then stand by it.
Communicate succession plans—Schedule a family meeting to discuss your decision. Highlight the reasons for the choice of successor and explain their future role in the business. Reassure the other candidates that your decision is in no way a reflection of your feelings toward them, but was merely one made in the best interests of the company. This isn’t always a smooth process, but if you explain your reasoning in detail, it can go a long way to minimizing inevitable hard feelings.
Prepare a management development plan—Some successors are ready to take the helm immediately, such as in cases when they’ve been working in the business for an extended period of time. But most will need grooming before stepping into their new role. That’s why it’s important to prepare a management development plan detailing exactly how that process will unfold.
Prepare personal development plans—At this stage, you’ll need to decide how to fill gaps in your successors’ operational skills and experience. That will likely entail some form of on-the-job training, or in some cases even further post-secondary education. Whatever the case, a personal development plan will help your successor build the necessary skills to assume their new role without delay—or operational disaster.
Assign coaches and mentors—Taking over a business is a tough task. That’s where coaches and mentors can help support a successor through the transition phase until they have the knowledge and confidence necessary to do the job. These should include the outgoing CEO/owner, trusted advisors, employees with a strong knowledge of operations, or other members of the executive or ownership group, to name a few. The point is to provide multiple points of contact for your successor to ask questions, seek advice and learn while continuing to grow your organization.
Manage the transition—Transitioning a successor into the business takes time. Even if the family member has direct experience operating the organization, budget at least a few months to let them learn the ropes and understand different aspects of the owner/operator’s role. Don’t hand them the keys and expect success a day later. Instead, ensure your availability during a clearly-defined transition period of up to two years. During that time, your involvement in the business should be slowly phased out—and might only ever include an advisory role—but being present to answer questions and provide advice on an as-needed basis can deliver the kind of support your successor will need to succeed.
Hartley Cohen, Partner