The Missing Middle: Making Succession Planning Part of Your Business’s Strategy
In over 28 years of working with privately owned businesses, I have noted recurring themes: an entrepreneurial spirit, commitment to family and community, and a focus on building a legacy. I have also seen a common and critical blind spot regarding succession planning and the requisite good governance that should underlie it.
The “Missing Middle”
For many private businesses, the missing middle is the strategic bridgework spanning two visions: the entrepreneurial vision that sparks the formation of a business and the long-term vision that enables a private company to pursue goals far into the future.
Owners of private businesses are becoming more aware of the need for succession planning and are now looking to turn motivation into action. Many of them are facing two difficult decisions:
Short term: “How do I plan for the management or perpetuation of my business in the event of an unforeseen occurrence such as my death or permanent disability?”
Long term: “How and when will I perpetuate my business into the future while realizing value for what I have built?”
Before I go on, I want to provide you with several key observations:
- Only about 20% of entrepreneurs have a written succession plan.
- As much as 95% of an entrepreneur’s net worth can be made up of the equity in the business.
- Very few entrepreneurs have created a separate asset base distinct from the business.
- The majority of an entrepreneur’s income is derived from the business.
- The average time between corporate planning reviews is 10 years.
- Most firms have never had a formal valuation conducted.
- Less than 30% of privately owned businesses are successfully transferred to the second generation, and the survival rate for those transferred to the third generation is even worse—only 15 out of 100 companies.
Recently, I read an interesting article titled “Now Everybody’s a Succession Planner.” An enormous number of people are giving advice on how to do succession planning, and a lot of business owners are receiving conflicting information. We have witnessed a number of “consultants” using this hot-buzz topic to drive new revenue, with no regard to whether they have the qualified expertise and experience to actually provide this advice.
Succession planning is not solved by simply matching two companies in a business combination. As a general definition, succession planning is the process of deciding when and how you would like the business to be managed or transitioned to protect it, its employees, its customers/clients, and its value against unforeseen events such as the premature death or permanent disability of its founder. Succession planning also considers whom you would ultimately want to leave or sell the business to and how to fund the transfer or sale. It’s a game of inches, but taken together, significant advantages can and will be achieved. Often, the pitfall is counting any advantage as too small or not worth it at all. The succession planning decisions you make now, or elect not to make, will be a major factor in deciding the future of your organization.
A succession plan needs to recognize that your current strategic plan and ownership objectives each play a significant role in the ultimate shape of the organization. A business owner must pull together experts from numerous disciplines—such as tax, legal, finance, valuation, business consulting, and investment banking—to present realistic, attainable, and tailored options. The succession planning process needs to challenge your thinking about your immediate situation and current business and future goals to develop a detailed roadmap customized for your firm and situation, with actionable recommendations and timelines. Just as important, you need to plan for issues that may not be apparent now but could affect the business going forward.
Once a plan is implemented, it is not complete. As you continue to operate your organization for the next several years, your business model will continue to transform and evolve, and your succession plan needs to provide a framework for consistency and continuity. Added personnel; enhanced depth and breadth of offerings, services, and products; and potential future acquisitions will undoubtedly alter the composition and dynamics of your business. Even though these changes may be minor and incremental, over time and taken collectively, they have the potential to materially affect the business and therefore should be recognized and addressed.
Developing long-term and emergency succession plans is a business owner’s fundamental responsibility, one that should be addressed on a regular basis and in advance of when the plans are actually needed. Long-term succession planning is significantly more complex than simply identifying the next CEO. Leading companies approach succession planning as an integral part of long-term strategic planning and the development of executive talent. Plans should include flexibility for changes as the corporate strategy shifts. A regular reevaluation of the succession plan not only mitigates the risks associated with leadership transitions, but also capitalizes on strategic and developmental opportunities.
A Tremendous Opportunity
At its best, effective, long-term succession planning involves an organizational commitment to developing a robust leadership pipeline and reinforcing the company’s vision and values.
It creates opportunities to define the company’s long-term strategic goals and challenges, identify the qualifications and expertise required to meet the company’s needs, and actively develop the diverse teams required to achieve success and build sustainable value. Succession planning is not merely part of a sound strategic plan—it’s a tremendous opportunity to perpetuate your values into the future.