Changing Places
Making a Success of Succession Planning for Entrepreneurs and Family Business OwnersBy David Franzetta Moss A. JacksonAuthorHouse
Copyright © 2012 David Franzetta and Moss A. Jackson
All right reserved.ISBN: 978-1-4772-6693-9 Contents
Preface...................................................................ix1. Why Start Now?.........................................................12. Roadmap................................................................113. Your Transition Advisory Team..........................................194. Personal Goals.........................................................295. Taking Stock...........................................................356. Focus..................................................................457. Family Considerations..................................................538. Hiring for the Future..................................................639. Leadership Continuity I: Changeovers and Buyouts.......................7510. Leadership Continuity II: Developing Your Leaders.....................8311. Selling Your Stake....................................................9312. Ready, Set, Go........................................................10313. DOs and DON'Ts........................................................107Endnotes..................................................................109About the Authors.........................................................112
Chapter One
Why Start Now?
Waiting for the fish to bite or waiting for wind to fly a kite or waiting around for Friday night or waiting perhaps for their Uncle Jake or a pot to boil or a Better Break or a string of pearls or a pair of pants or a wig with curls or Another Chance. Everyone is just waiting. -Dr. Seuss
Any entrepreneur or family-business owner who is considering an exploration of the subject of succession and transition planning has to begin with the question, "Why bother?" After all, most business owners are generally happy with how their business is going, and look forward to continuing to work in the business for a significant period of time, well into the future. It's easy to simply dismiss the issue of succession planning—leadership continuity, in other words—or put it off to some future date.
But, whether you like it or not, the future has a way of sneaking up on you. At some point you are going to be changing places. You will stop going to the office every day, and someone else will take over for you. You will find different ways to enjoy yourself, maybe even crossing items off of your personal bucket list.
You are probably like every other entrepreneurial business founder and owner, hoping to create a successful future, both for yourself and your loved ones, as well as for the next generation of leaders of your company (who in some cases might be your own children). Unfortunately, many entrepreneurial businesses—and most family-owned and run entrepreneurial businesses—fail to successfully navigate the succession and transition process.
Only one in four such businesses makes a successful transition to the second generation, the others failing or being sold before the children of the founders get a chance to take over. Of those that do last to the second generation, only one in three makes a successful transition to the third generation. These are not encouraging statistics.
And this is not merely a twenty-first century problem. The failure of businesses, especially family-owned businesses, to last more than one generation is so pervasive that there are stock phrases in many languages describing the propensity for family-owned businesses to fail before the founders' grandchildren have taken charge:
• In the United States, Shirtsleeves to shirtsleeves in three generations.
• In Mexico, Padre bodeguero, hijo caballero, nieto pordiosero. (Father merchant, son gentleman, grandson beggar.)
• In Brazil, Pai rico, fil honobre, neto pobre. (Rich father, noble son, poor grandson.)
• In China, Fu bu guo san dai. (Wealth never survives three generations.)
• In Italy, Dalle stalle, alle stele, alle stalle. (From the stables to the stars and back to the stables.)
A Head Start
We'd like to help you improve your personal odds by giving you a head start on building a viable succession and transition plan. Our goal is to help you approach the track record of the world's longest-surviving family-owned business, The Houshi Onsen, a traditional inn in Japan that is currently run by its forty-sixth generation of family members.
But be cautioned: even when a business owner works diligently to create business succession and transition plans; things don't necessarily go forward smoothly. While the plans may appear sound, there are often many invisible obstacles and interpersonal land mines that blow up and destroy people's dreams and relationships. As William Bridges has pointed out in Managing Transitions: Making the Most of Change,
It isn't the changes that do you in, it's the transitions. They aren't the same thing. Change is situational: the move to a new site, the retirement of the founder, the reorganization of the roles on the team, the revisions to the pension plan. Transition, on the other hand, is psychological; it is a three-phase process that people go through as they internalize and come to terms with the details of the new situation that the change brings about.
Managing your way through these transitions is the key to successful succession planning. Founders and owners need detailed plans with carefully plotted paths to help the different generations of owners and leaders uncover these land mines and successfully navigate through them toward a promising future.
The Reality
Given the importance of careful planning to the continuing success of an organization, it is perhaps surprising that the number of U.S. organizations with a formal succession plan in place decreased during the most recently studied five year period—from 29 percent in 2006 to 23 percent in 2011—based on a poll from the Society for Human Resource Management (SHRM).
According to the SHRM poll data, less than a quarter of businesses have a formal plan in place, though the numbers improve when informal plans are considered, with more than one-third, or 38 percent, of organizations currently having at least an informal succession plan or process in place (up from 29 percent in 2006). The number who said their organization had no intentions to develop a plan remained roughly unchanged from 16 percent in 2006 to 17 percent in 2011.
Sixteen percent said their organization's staff size is too small to create a formal succession plan. Again, not surprisingly, virtually all family-owned and run businesses fall into this grouping. The owners of these businesses keep their eyes on the road directly in front of them, but spend little or no time thinking about or worrying about what challenges might face them in the future, when they have to consider transition of their business ownership and management to the next generation of owners and managers.
Why Avoid It?
The obvious question is why do entrepreneurs avoid succession and transition planning? Again looking to the SHRM report:
The number one reason organizations are not developing formal succession planning is because more immediate projects are taking precedence—not surprising given that organizations are focusing their energies on dealing with an uncertain economic outlook. Still, succession planning has significant strategic implications for organizations and should not be put on the back burner, especially during times of economic volatility.
Perhaps it's because leadership transitions at privately held companies take place so infrequently that little attention has been paid to how to do it. After all, many family businesses have the same leader in place for twenty to twenty-five years. Compare this to publicly–owned firms, where the average CEO tenure is six years.
It is easy to see that the extended tenures of family-owned business leaders can increase the difficulties of coping with generational leadership shifts, especially in the areas of technology, business models, and consumer behavior.
There is a lot more behind the avoidance of succession and transition planning than concern about today's economy. Entrepreneurs avoid planning for transitions for all of the commonly accepted reasons that people avoid changes of any kind. They opt for the apparent certainty of continuing their current day-to-day routine, rather than planning for an admittedly unfamiliar and uncertain future, hoping that things will work out for the best. If this sounds like you, you have the consolation of knowing that you have a lot of company.
But as Benjamin Ola Akande, economist, scholar, and the Dean of the Business School at Webster University in Saint Louis, wrote in an open letter to Barack Obama in January 2009, "Hope is not a strategy." You have to take action to get results.
When to Start
So when is the right time to start succession and transition planning? What should the timeline be for creating a succession team of managers willing and able to buy out the founder's interest in the company—probably relying on the company's earning stream to fund their purchase?
Some business owners in their mid-forties to mid-fifties ought to be moving on this issue now, even if they aren't planning to retire for another ten years or more.
Even if you can't imagine retiring, there are reasons to get started without delay. Events might conspire to cause you to change your mind about retirement. Changes in your family situation can be unpredictable. Personal health issues might slow you down. You could change your mind about your retirement timing and find yourself behind the eight ball on succession and transition planning.
One of our associates relates a story about his father, who thought he'd never retire and hoped he could work until he was seventy. He'd worked for the same company his entire career. But then, at age fifty-nine, he started losing his friends–four in the autumn of the same year. One had just retired and died of a heart attack. Another died on the dance floor with his wife. And two died of cancer. So he started attending retirement courses at church and was out of the office by age sixty-two. You just never know how things are going to work out for you.
And just in case you don't think you're ready to put your focus on succession planning, because you aren't sure if you are ready to think about `letting go" of what you've invested decades of your life creating and building, you should consider the advice offered by Jennifer Miller in her blog, The People Equation, when she wrote about "10 Signs That It's Time to Move On:"
It can be hard to know when to let go. Memories—and the emotions they evoke—are powerful forces for keeping us where we are.... There are probably a whole bunch of reasons you can use to convince yourself to stay, but keep this in mind: ... Nobody benefits from you hanging on to "what used to be". If you know that it's time for you to make a move, do yourself and everybody around you a favor: make a plan for your exit.
Another way of thinking about succession planning might be to consider the amount of value that would be created—and added earnings that would result—if your management team were running in top form between now and that uncertain date in the future when you decide it's time to step down from running your business.
If you want your company to outlive your own personal involvement, then, by default, you have to care about the culture of the organization, and the quality of the talent that you have developed. Moreover, every bit as important as the quality of the talent is the extent to which these talented people are a good "fit" for the culture of your company, today and into the future.
Whatever your choice of outcome, though, it won't simply happen by itself. You have to take charge and lay out the necessary action plans. This is your life and your journey. Don't take a chance and leave it to chance. Think about what kind of future you want to make for yourself and your company, and start planning for it.
Our friend Steve Murray of REAL Trends likes to say that if you don't have a succession plan, then you are a seller, whether you think you are or not. And if you are a seller, you had better be working on developing the best possible team to manage your company and improve its value, today and into the future.
We think it makes perfect sense to begin thinking about succession and transition planning as soon as it is practical. For many of you, that means right away. If that's the case, keep turning the pages.
Key Questions to Ask Yourself
• In what ways would a succession plan be of value to me, both personally and for my business?
• What is currently preventing me from creating a succession and transition plan?
Chapter Two
Roadmap
The winds and waves are always on the side of the ablest navigators. -Edward Gibbons
Suppose you are planning a vacation. There are many things to decide. Sometimes you pick your desired activities first, in which case the time of year and weather determine your destination. For example, if you want a skiing vacation, you'll go in the winter, and you'll go to Colorado, or Utah, or Quebec—somewhere with mountains and snow.
Or you may start with timing. If you have children in school and want to take a family vacation together, you'll select a time during the summer when school is out, and then choose a suitable location based on how you plan to get there: by car, by plane, etc.
You make these basic decisions first; then you get into the details of your planning, with maps, guidebooks and other materials on hand to help you get the most out of your vacation. You'll plan your route, taking into consideration what you want to see and do along the way. If you're driving, you'll make sure your GPS navigation system has the latest version of the maps. You'll try to anticipate and avoid unnecessary detours and traffic delays.
Suppose you didn't know where or when you wanted to take that vacation. You might then put off your vacation indefinitely. Or just go somewhere and wander around aimlessly, hoping to chance upon something interesting or exciting. You might even have a memorable adventure or two along the way; but you might also endure some unintended consequences, like traveling the route with major road repairs, missing a fabulous festival by one day, or sleeping in your car.
Most of us don't really want to leave the planning for the future of our business to chance, especially if we have devoted most of a lifetime to creating it, and if a large part of our family's wealth is tied up in it. We want to find a path that will allow us to secure a comfortable lifestyle for as long as we live and to find more time toward the end of our lives for family, friends, and cultural and intellectual pursuits. We need a thoughtfully designed roadmap for how to get there; and that's what this book is about.
Starting the Journey
Assuming you are ready to embark on your planning journey, you may now be wondering: How quickly should I be moving ahead with succession and transition, and how soon does it all need to be done? How can I possibly tackle this while trying to run a business? And, With whom should I be sharing my plans?
Let's look at the question of confidentiality first. If you are married, always talk with your spouse. Your spouse probably knows you better than anyone else, and can help you face your personal, family, and business situation frankly and honestly.
If you have a close personal advisor—perhaps your attorney, your accountant, your financial advisor, or a close personal friend— it may make good sense to bring him or her into your confidence. Just be sure that it is someone whose discretion you can absolutely trust.
Beyond your spouse and a close personal advisor, the specifics of your situation will help you determine who else has a need to know about your plans, and how much of the detail you should be sharing with others. We'll talk more about this in Chapter Three.
The best time for succession planning is similar to the best time for planting an oak tree—twenty years ago. But most of the time, for whatever reasons, it didn't get done. So that takes us to the second best time: today.
Dave recently overheard an interesting conversation in an airport. He was minding his own business, but those magic words "succession planning" jumped out and immediately drew him in. What really struck him was how creative and rationalizing we can be when faced with actions we don't really want to take. Here's the distilled version:
I probably should do something about succession planning, but the timing just doesn't seem to be right. There's a wedding coming up, we've got another grandchild on the way, and none of our children seem to want to have anything to do with the business. Maybe I should just sell it.
Positive Focus
The reluctance to get started is almost always the result of a fear of the unknown or the potentially uncomfortable. Many people are afraid it will be stressfully hard work.
But what if succession planning were actually an enjoyable process that brought harmony to a struggling family or a group of discontented business partners? What if it resulted in the current generation of owners finding ways to develop financial and emotional independence away from the business?
(Continues...)
Excerpted from Changing Placesby David Franzetta Moss A. Jackson Copyright © 2012 by David Franzetta and Moss A. Jackson. Excerpted by permission of AuthorHouse. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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