Nine Reasons for Succession Failure
Common Mistakes in Succession Planning
Increasingly we are finding that effective succession planning is a combination of both “art” and “science.” Just as it would be difficult to
develop and implement a plan relying solely on experience and instinct, it is impossible to do the same without relying on proven
strategies.
Many of our clients come to us after they have done some preliminary work on their succession planning. In nearly every case we find at
least one (and frequently several) of the following mistakes. Mistakes that can jeopardize the entire succession process if they are not
addressed. The most common are:
1. Attempt Succession Planning Without Other Strategic Plans.
Succession plans define a company and its successors, whether the latter consists of family members, employees or external buyers.
But what are successors actually receiving? If the current owners have not invested time to develop a comprehensive business strategy,
future successors will end up with a company - or practice - that has no vision, no strategy to deal with the competition, and no plans for
changing the way it does business. Every firm should have strategic plans. Doing so will improve the company’s profits as well as its
market value.
2. Fail to Create a Market for the Company.
Too many small and medium-sized business owners operate under the myth that when it comes time to retire, they will simply sell the
business, invest the equity taken from the company, and retire with a bundle of cash. But that is more of a myth than a reality. Each year
thousands of businesses are listed for sale - and there are no buyers. We counsel our clients to begin the process of positioning their
business or practice for sale at least 5 years before the scheduled event. During this time owners should concentrate on factors that
drive the transferable value of the business including profit enhancement, “bench strength” of key personnel, management succession,
operating efficiencies, customer/client mix, market dominance, key operating ratios, etc. Marketing strategies should also be
implemented. Otherwise, they may not have any choice in selecting successors or a new management team.
3. Procrastinate.
There is a general rule of thumb we give our clients regarding their succession planning: The longer the runway, the smoother the
landing. Nevertheless we find that most owners give a variety of reasons for procrastinating about developing their succession plans: too
many pressing matters at hand, thinking about passing the company on to a new generation is depressing, there is plenty of time, and
the current owners will be around for a long time. Sadly, the lack of planning can be devastating to a business when it faces an
emergency. It can also be devastating to an owner when he or she (or their family) is forced to sell. Ironically, firms prepare for
unexpected expenses by maintaining cash reserves, but most closely-held middle market sized businesses fail to take their risk
management any further.
4. No goals.
Without an end goal in mind, firms are unlikely to experience a positive succession. Having spent much of their life building a business
or practice, our clients have come to appreciate our insistence on creating goals on such issues as when it is time to sell or transfer
power, what the current owners will do after they transition from their business or practice, how the business or practice will be financed,
what type of buyer will best support the owner’s financial and legacy goals, and how to execute the actual transfer to ensure the greatest
return to the owner. Keep in mind that these are just a few of the key issues of succession planning that must be addres
5. No Independent Valuation
For most owners, the value of their business or practice represents a significant portion – upwards to 50% or more – of their personal
wealth. Nevertheless, most are moving ahead without a realistic understanding of what their company is worth. Not only is it hard for
them to attract good buyers or successors, but emotionally they may be moving ahead to an unrealistic future. There are times when the
current owners discover the business they have developed and the capital they have acquired is valued much less in the market than
they personally thought. By establishing an initial estimate of value early on, owners can address factors that may improve the value and
salability of the business while adjusting to any external events affecting value that is beyond their control.
6. Sell to an Insider Who has Little Funding.
For sentimental reasons, many business owners prefer to transfer ownership to a trusted employee who has been with the firm for
years. But generally these employees have little funding to acquire a business. In that case, the current owner may want to create a
deferred compensation plan and long-term buy-out agreement that will not provide the cash needed to support his or her transition
plans. Furthermore, we have worked with many clients who have discovered – before hand, in most cases – that being a trusted
employee is not a guarantee that the person will be a good owner. In this case, the selling owner is putting their future at the risk.
7. Ignore Training.
Many owners fall into the trap of thinking they have to accept their successors as they find them with their existing skills and experience.
But if key skills and responsibilities are missing from the background of a likely internal successor, then management succession
planning is necessary in order to train and develop that successor into a better and more qualified person. Our clients tell us that they
appreciate the fact that we view training as more than classes and comprehension. Instead, management succession planning – a key
part of the overall succession planning process – is formulated around the specific skills and abilities needed to successfully support
the company’s strategic, profit-increasing and value-improvement needs. The one-size-fits-all, generic leadership training courses are
ineffective and usually – from what we have seen – a colossal waste of money.
8. Keep Succession Plans a Secret.
When employees are left in a vacuum as to the owner’s intention for the company, it creates the impression that the firm has no
succession plans. As a result, new owners can be treated with suspicion, particularly if they have been a part of the business. By keeping
the succession plans to themselves, owners can unwittingly give key managers and employees a reason for leaving the company.
Especially if they see themselves as possible successors.
9. Develop a Succession Plan Once.
Things change. That’s one of constants of life. Yet many owners make the same mistake in their succession planning as they do in their
estate planning, wrongly believing that once written there is no need to revisit or revise it. But succession planning is a dynamic process
that involves constant adjustment to external market changes, internal training and development, renewed strategies and marketing.
Occasionally we have reviewed succession plans that have not kept up with the growth of the business, the changes in the market, or the
interest (and disinterest) of identified successors. As any living document, the succession plan should be written, reviewed and revised
annually until the owner makes his or her successful transition to their new life.
We have found that owners can create and implement a comprehensive succession plan that serves them when needed most. By
avoiding these nine pitfalls, owners are finding that the transition from their business can be just as rewarding as the time invested to
grow it.
©Paul Brown 2005 to current