There are risks and benefits when leadership changes, and both are too important to ignore. Succession plans ensure a better transition between owners. They can also be the difference between surviving or permanently closing.
Succession plans are about replacing yourself. They outline a process where the first step is to move someone into management before becoming the new owner. They are especially important for dealers because so many people within the dealership rely on its continuation.
Suppose one or more owners want to transfer their business to someone else. In that case, the work to be done includes identifying and maintaining whatever makes the business valuable, developing employees who can potentially step into a larger role later on and figuring out the best tax strategy before and during the transition.
In many businesses, the pandemic changed business transition plans, timelines or both. Some owners plan to transition sometime during the next decade. Regardless, the best time for any company to transition is when the company is prospering. There’s less chance of running out of needed resources at a key point of the transfer.
As you make your succession plan, keep the following suggestions in mind.
- Decide what you want to do first. There are several questions to answer before you start. Are you ready to sell your business? If you want to keep the business in the family, who could lead in your place, or should leadership involve several people? Is anyone going to feel bitter or unhappy if you don’t select them? If you want to sell the business instead, what will that mean short-term and long-term?
- Schedule planning sessions as soon as possible. You want to maximize the number of choices you have, not be forced into less-than-ideal decisions by urgent circumstances. If you are selling soon, you need to enhance the company’s value as much as possible as soon as you can. If selling the company will happen later, the focus should be on preserving its value even if you don’t have to increase its value.
- Ask the right questions by looking at your company from the perspective of the next owner. What should you be asking? Just as transferring an unprofitable company doesn’t make sense, it also doesn’t make sense to transfer a company whose success depends too much on retirement-age people. Figure out what makes the company stable and sustainable, and make sure the company’s success is not dependent on one or more key people who plan to leave. Another area to focus on is technology. Owners who want to transfer their company will have an easier time doing so if they have up-to-date equipment and processes.
- Do your best to anticipate possible crises. You can’t expect to see everything in advance, of course, but there is a lot you can see. Do you have enough financial reserve to get through a short-term drop in revenue? What if you or other key employees died or were hospitalized? Do you have people who could step up and take over daily operations? What if you lost an important, long-term client? Do you have enough business from other clients to survive?
- The company should be bigger than one person, especially if that person is you. Cross-train several people within the company so other people are ready to fill in the gap if one or more key people are unavailable. This group is your management team. Write job descriptions and identify the characteristics and traits needed for each job. Assess how people are doing in their job, and help them fix gaps. Company leaders need to understand the business, but they also need to understand its history, risk-tolerance and values.
- Invest in key employees and give them reasons to stay with the company. Let them have a voice in some of the decisions. Each generation has its strengths, but your strengths and theirs are probably not the same. The internet was launched April 30, 1993, almost three decades ago. Inevitably, people who came of age after 1993 are usually more comfortable with technology.
- Retirement doesn’t have to mean quitting completely. Of those surveyed, 30% wanted to hand off leadership to others but continue to work for a while. About 7% still wanted to own the business but wanted to decrease their involvement.
Invest in key employees and give them reasons to stay with the company. Let them have a voice in some of the decisions. Each generation has its strengths, but your strengths and theirs are probably not the same.
Start preparing the new owner as soon as you identify them. If you plan to sell your company, for whatever reason, it’s a good idea to hire the potential new owner first. That way, they get the same benefit they would have had if they’d been a member of the family.
Sometimes it isn’t immediately clear whether a family member would like to take over the company. Maybe they are in school; maybe they’ve chosen a different career for at least a while. Giving them time to grow and decide isn’t bad. One attorney noted that the best successors often worked a few years outside the family business. What is the benefit of that?
- The best choice might not be available for a while, especially if they are still growing up. Some people are worth waiting for, if at all possible.
- The owner needs to be a person who communicates consistently and effectively and can build consensus. Employees who know the company is stable and doing well reward that with increased confidence in their work.
- Experience gained in a different environment can give your successor an invaluable perspective that will benefit the company if they return.
- Respect has to be earned, not given, and other employees are more likely to respect someone who proved they can succeed independently. It’s a problem if the new owner looks as though they bypassed gaining the necessary experience.
Sometimes an unqualified family member wants to take over the family business, and the owner doesn’t want to tell them they aren’t a good fit. Yes, that’s a hard conversation. But if you don’t evaluate them fairly and hold them to the same standards as people outside the family, you are setting them up to fail. They may destroy the business, and if they do, everyone involved will have to develop a plan B. You don’t want that.
How can you evaluate the next leader? The necessary skillset includes the following:
- Courage and integrity both matter in any industry. Bad work and poor leadership will cost you repeat business. Also, employees who don’t respect their leaders are likely to move on as soon as possible.
- The owner and other leaders within the company need to have the technical and interpersonal skills to make the right decisions.
- Businesses are a team effort. The owner needs to support ongoing learning effectively and be a team-building coach.
- Everyone in the company should ideally develop and share the same overall vision, but the owner has a particular responsibility to set optimal goals and help everyone accomplish them.
- It’s a joke, but it’s true: change is a constant. The owner needs to be flexible about plans, or the company will flounder at some point.
According to Family Business Review, which focuses on family businesses, more than 30% of family owned businesses get passed on to a second generation, 12% survive to the third generation, and 3% remain in business after the fourth generation. Of course, there are other kinds of multigenerational businesses, but succession planning increases your odds for success no matter who owns the business. That is why it is worth doing.
