No one goes through the work, risk and sacrifice of starting a business without hoping it will last. Building value that endures is the dream that motivates entrepreneurs. Yet in many businesses, too little of that work goes into determining who will take over when the founders leave the stage.
It is commonly believed that only 20% of business owners have a written transition plan, and there are several reasons for this common oversight. Some business leaders are too caught up in the challenges of the present. Some have a subconscious aversion to the reality that they won’t be around forever, or assume succession will work itself out naturally. Others find the sheer complexity of the task overwhelming.
Ultimately, however, the reasons people avoid succession planning aren’t as important as the reasons they should embrace it. For a business, working without a succession plan can invite disruption, uncertainty and conflict, and it endangers future competitiveness. For companies that are family-owned or controlled, the issue of succession also introduces deeply emotional personal issues and may widen the circle of stakeholders to include non-employee family members.
The next 10 to 15 years may bring substantial transfers of wealth through business ownership handoffs across generations and other new ownership structures. The long-term survival of those businesses, and the preservation of the wealth they have built, will depend upon a clear and early focus on embedding transition planning into each company’s strategic vision.
You Can’t Plan for the Future Without Understanding the Present
Succession planning is a complex process that draws upon different business disciplines. Many privately held businesses display solid professionalism and enviable profits in their daily operations, yet they fail to properly plan for and complete the transition to the next generation of leaders. Even the most sophisticated and knowledgeable business professionals can get caught in a web of complicated issues. In fact, many business owners do not carry out a managed transition to a successor on their leadership team.
In the case of privately owned businesses, only 30% survive into the second generation, 12% survive into the third and about 3% operate into the fourth generation and beyond. An owner-manager usually has a personal vision to retire and sell the business “someday,” but they may not have adequately considered what it will take to make that vision a reality. Even leaders who profess they’ll never retire must acknowledge that no one remains at the helm forever. An unprepared new management group or even a poorly managed transition to competent management can trigger significant loss in the bussiness’s value.
To retain value, leaders should begin the planning process sooner rather than later. Many leaders choose to embark on a long-term program to identify and groom the company’s future executives. In some cases, a careful planning process may reveal that selling the business instead of maintaining successor ownership really is the answer for their situation. Not all succession plans are created equal. If your business has a succession plan in place, the questions below can help determine how effective that plan and your current practices actually are.
A good plan takes time to develop and implement. When you engage in succession planning, you’re not just focusing on the future; it’s impossible to plan for the future without a deep understanding of the present. There are many benefits for companies and owners who plan properly and strategically for an orderly transition of management and ownership. A plan helps you:
- Grow your business and help ensure its survival.
- Retain control of the process instead of having someone else make decisions.
- Preserve harmony if your business is family-owned.
- Facilitate the retirement for the current leadership generation.
An inclusive approach focuses on the crucial components. The owners of privately held businesses face complex planning issues. For some, the first order of business is the long-term success of business operations. For others, the priority is the preservation of family wealth — an equally complex challenge that may not always align perfectly with the goal of perpetuating the business.
Don’t Let Doubts Distract You From Ensuring Your Business’s Longevity
Even when everyone agrees succession planning is important and necessary, reasons to delay the process have a way of sprouting up. Leaders often:
- Aren’t sure exactly whom to call for help or how to start.
- Worry about being fair to potential successors.
- Struggle to acknowledge those personnel whom they want to retain on the management team but aren’t in line for ownership.
- Find it difficult to discuss financial matters and personal goals with others.
- May not wish to retire.
- Struggle to disconnect from day-to-day urgencies to focus on long-term planning.
- Are reluctant to commit to complicated strategies that may save taxes but don’t address their own non-tax goals and concerns.
- Don’t believe successors are ready to assume control, and so they feel nothing can be done.
- Feel the entire process is too daunting.
- Perceive succession planning is a cost that delivers no immediate benefit.
These anxieties help explain why so few private businesses have an actionable succession plan in place. While some business owners simply ignore the issue, too many may focus too narrowly on individual elements of a succession plan without taking on the full range of important issues. The result can be false security followed by a poor outcome for everyone involved. These potential blind spots in long-term planning can cost business owners and families through lost future value as well as a hit to their legacy.
An inclusive, multidisciplinary approach to succession planning can dramatically increase the chance for desirable results, aligning goals across time — and across roles. Taking the time to understand the factors that really drive a company’s continuity and growth can help owners and stakeholders create strategic priorities and develop a detailed action plan.
It’s common for leaders to think of succession planning in terms of ownership transition. But it’s just as important to think of an organization’s operating structure and how it may change over time. What are the functional activities that must happen today? How will they be different tomorrow as the business grows? Will your customer base, suppliers or product mix experience significant change?
This exercise turns the perspective of planning from two-dimensional snapshots of “now” to three-dimensional representations. In this three-dimensional approach, succession planning extends to all levels of the business. Leadership, management and business units all have succession issues to address. You may put more detailed effort into determining who will be the next CEO, but the business stands to suffer if you don’t also plan for who will succeed each department head, manager, supervisor and significant team members. An inclusive, multidisciplinary approach to succession planning can dramatically increase the chance for desirable results.
Your Long-Term Strategy Will Come Into Play
There is a cultural component to predicting and managing these changes. Studying and analyzing an organization’s culture can help leaders see patterns and subcultures that have as great an influence on daily operations as any formal standards. A company’s culture is derived in part from the vision of what it is to become. Does a small or medium-sized business aspire to be huge? Or to maintain its size? Are there plans to go global? Variances in these and similar paths ask different things of people.
Oftentimes overlooked or uncoordinated with the succession plan, the company’s strategic direction needs to be planned and accounted for by business owners. In short: How do you build a successful transition plan if you don’t know where your company is headed? What does the business planning do that will make an effective succession worthwhile?
The quick take-away on business succession planning is that there is no quick take-away. It should come as no surprise that preserving an organization’s value for the future is just as challenging as building that value in the first place. But when business owners get started early and take their business’s long-term strategy into account, it can go a lot smoother.
If you want to learn more about how to build an effective, strategic transition plan that creates enduring value for your business, contact Wipfli’s Business Transition Group.