A primary hurdle in a business transition is replacing the owner or owners. The stakes are high both personally and financially. Can a business continue to run without the owner’s leadership? Who will take the reins? And will the business be of value to potential buyers without the owner?
A succession plan must outline how to educate and build bench strength, groom emerging managers, develop leadership training and identify future owners. In a broader sense, it is about creating a culture of continuous succession that focuses on human capital and protecting the future of the company.
A well-devised succession plan shows business owners how to replace themselves. The process turns chosen management performers into a championship team that first works alongside the owner, and then eventually shifts into independent leadership.
A succession plan can take several months to write but years to execute. Depending on the readiness of management, the type of exit and current payout, the execution of a succession plan may take three to 10 years.
On the other hand, if an owner has systematized their business, has clean financials with mature management in place and can take a several month vacation, then the company could be sale-ready in less than two years.
While there is no universal template for a succession plan, here are the key steps in succession planning for any business owner.
1. Complete the exit plan.
The formal succession process does not begin until the owner can begin to visualize a clear financial future outside of the business. This requires an exit plan. A large part of the exit plan is income replacement for the owner, tax reduction and legal risk reduction.
2. Establish a clear direction.
It will be the management team’s responsibility to take the reins and engage the company in this plan, and to communicate and ensure the plan’s implementation. The direction begins at the top, and this exercise will help the team to begin seeing their future. This planning also creates a forum for the management team to work together to collectively develop unanimity.
3. Revise the organizational chart.
Create an organizational chart with the age of the associates. Create job descriptions for the CEO, senior management and administrators. Create position summaries describing the disciplines needed for each role. Review the current organization for gaps in age and types of positions.
4. Develop management succession.
Management succession is more than the replacement of talent; it is the development of talent. This is a time for the new team to reexamine and improve performance of the company’s systems in a process of continuous improvement for the company’s productivity and profitability. The new management team should lead this process and educational effort for the entire company. It is a time for the owner to coach and stretch managers into champions.
When choosing future leaders, be sure to consider Emotional Quotient, or EQ. EQ has emerged as a way to measure non-cognitive skills. Some researchers argue that EQ is more important than IQ in the workplace, and studies have found that EQ is a key ingredient for leaders.
5. Train future leaders.
Once a new management team is chosen, the owner must help them grow into leaders who meet deadlines and corporate goals. Those managers must now rise to a higher level of leadership to set a corporate direction and build consensus.
An owner will need to work with new managers to change behaviors and build self-awareness, while still maintaining morale. Methods such as peer evaluation and personal coaching may prove helpful as employees move into the next level of leadership.
Succession and behavioral change take time, and the sooner training begins, the better the results will be. There are three parts to this training: education, coaching and stretching. An owner will spend about 30% of their time within the former stages, leaving 70% of their time for the stretching processs, in which managers are field-tested and asked to apply learned techniques, make mistakes, adapt and mature. This is the most important aspect of the training process.
6. Coach the new CEO.
During the succession process, an owner’s new focus becomes preparing the next CEO for success. It will mean letting go and allowing the new CEO to transition into the new role. The owner and successor should collaboratively decide the process, timeline and curriculum.
The role of the owner in the transition process to the new CEO is also to take a final inventory of strengths and weaknesses. Meet with the selected CEO and collectively prepare for the new role.
During this period, exiting owners should develop a strategy of which key stakeholders the new CEO should work to develop. Have an immediate plan to involve successors in the owner’s relationships with banking, bonding, insurance, key customers, the board of directors and strategic planning. Allow time for these important relationships to form and, eventually, leave them alone.
Remember, this process is all about the new CEO, not the exiting owner. The exiting owner’s role is to teach, coach and ensure the company’s future success. The new CEO’s management and leadership style likely will differ in many ways from that of the existing owner. An existing owner should let the new CEO carve a new path (unless an obvious disaster is imminent).
7. Prepare to be a lame duck.
While the succession process will be different for every CEO, one factor will remain the same in almost all cases. Eventually, the exiting owner’s phone will stop ringing, managers will bypass the exiting owner and move directly to the new CEO, and the exiting owner will be out of the loop. When this happens, the good news is that the process is working as it was designed to do, and the exiting owner has succeeded where most CEOs fail.
One of the largest symbolic messages to the new CEO and corporation is when an exiting owner relinquishes their office and moves down the hall. This is when the new CEO is fully engaged in running the corporation. Their relationship is now advisory, coaching and minimal. The owner’s goal is to take more time away from the business and let the new CEO and team develop on their own.
Because this process is often more emotional than expected, an owner must work to focus on life outside of the business. During this time, exiting owners should spend shorter days at the office and more time away from the business, developing hobbies, taking occasional vacations and moving into the next stage in life.
