M&A Basics: Creating a Value-Added Succession Plan

By Generational Equity

05/15/2015

You have to love entrepreneurs and the skills, strengths, aptitude, and attitude that enables them to risk everything to build something. Having worked with leading visionaries who are true serial entrepreneurs for nearly three decades, I can honestly tell you that without them, our economy and society would not be nearly as vibrant, growing, and diverse.

However, a couple of their key qualities can, in the long run, actually end up hurting the very entity they have founded if not managed correctly. To put it bluntly, far too many entrepreneurs lack the delegation, mentoring, and personal development skills that are so vital to help a business reach its full potential. This is not a knock on this group. Rather it is simply an observation that their leadership strengths, decision making skills, and vision often run counter to one fundamental dynamic: eventually a successor must be groomed. This is a reality far too many business owners put off.

One of the most important roles we play with our clients is to help them analyze their businesses the way buyers do. A key detail that buyers review when looking at any target is this: If the seller is not going to stay long term after a reasonable transition period (usually 1-3 years), then has an internal replacement been groomed? Is there talent in middle management to assume a CEO role? This is especially critical if the company is dependent on the current owner for most (if not all) important decisions.

I recently had the opportunity to participate in a CEO Briefs webinar entitled “Best Practices for Creating a CEO Succession Plan.” If you are not familiar with them, CEO Briefs (a service of the Financial Times) “is an exclusive knowledge network for career-driven thought leaders. As the leading publisher of professional on-demand resources for senior executives, [they] strive to eliminate career roadblocks, sharpen principal skills, and continue to educate top leaders on hot topics impacting their profession.” They do a tremendous job focusing on providing relevant educational materials that pertain to critical C-level issues.

This particular webinar was led by Aaron Sorensen, Ph.D. with Axiom Consulting Partners, an internationally known business consulting firm. Sorensen is considered a leading expert on CEO succession planning, and I found his information timely and informative. It was an hour-long seminar so I won’t be able to cover all his information. A few of his points were extremely informative and important for CEOs to consider:

• Poor CEO succession planning can erode value in a much shorter period than other competitive threats.
• Family-owned businesses face unique challenges when creating succession plans. Political, social, and inter-family issues can arise, so is the qualified successor a family member? Should they be?
• Make your assessment process for developing leadership as scientific as possible… Avoid gut-level assessments, the more you review and inspect performance the better your process will be.
• Too many businesses examine leaders based on competencies they have today,NOT competencies they will need to lead the company in the future.
• “What got you here won’t get you there.” – Marshall Goldsmith

Each of these points is critical to consider, especially if you are planning to sell your company during the next couple of years.

The Facets of Successful Succession Planning With a Buyer in Mind

First, you need to see the development of a successor as a financial investment in your company. Far too many business owners do not. Sorensen is right; if you don’t find and groom a replacement, buyers will view that as a risk, and any perceived risk will impact your ultimate valuation. Consider the financial consequences as you weigh the cost of creating a successor. 

Secondly, let’s address how family plays into it. Based on our years of experience, succession plan creation for privately held companies is even more complex given inter-family dynamics and the raw fact that sometimes a family member is the worst person to identify as a successor. Buyers often view that as a risk as well. It is vital to look for the BEST talent, not just the next family member in line to assume your role.

Be sure to assess your potential successors as scientifically as possible. This means you need to expose them to all facets/departments of the company and see how they handle issues and people. Track their progress, document it, and use what you see as performance to make your succession decision.

And most importantly, as Sorensen so accurately points out, a successor needs to be identified who has the skills to take the business to the “next level,” not maintain the status quo. The quote from Marshall Goldsmith is so on point. If you look for someone exactly like yourself, you may be short-changing the company and any future owners. The skills to start a company are not the same as those needed to take a $5 million company to $25 million and beyond.

But What About My Reality?

Now some of you are reading this and saying, OK, sounds great but I don’t have the time to identify and groom a successor because I am too busy running my company. Well you just explained why you NEED to do so if you want to build a buyer-ready business.

And even if you own a smaller company, it is still possible to develop a successor. Don’t over-engineer this process. Groom the person in your organization you believe can replace you, and simply delegate a few minor decisions to them. See how they think, how they communicate. If they do well with minor ones, move up to major ones and review their decision-making process. Finally, if they pass this test, examine their leadership potential. Can they communicate? Do they have the respect of their peers? If you are gone, will they be able to work well with a new owner(s)?

So keep this as simple as you need to but most importantly do not put this off. As Sorensen so correctly points out: “Poor CEO succession planning can erode value in a much shorter period than other competitive threats.”

This is especially true if you are trying to build a buyer-ready business!