The Sticky Issue of Succession Planning

Even the most forward-thinking business owners get squeamish when asked about their succession plan. But a succession plan is like a will; if you don't have one, all your hard work could fall into the wrong hands.

by Judy McGinnis

September 1, 2005

S herri Fallin, Nichole Taylor and Arlene Large were seated in a fancier than usual restaurant for their regular monthly senior management meeting with principals Lee and Jenny Duffey last October. The Duffeys, co-owners and equal partners of Duffey Communications, reflected upon the founding principals of their public relations agency, how it had developed in the subsequent 20 years and what the future might look like.

Then came the biggest surprise of the three women's lives.

"Lee proposed that we lead the company into that future because they had decided to retire. It was so unexpected, we just looked at each other at first," recalls Taylor. "He gave us a few weeks to decide."

In January, after three months of friendly negotiations and meetings with lawyers, accountants and financial advisors, Fallin, Taylor and Large took over Duffey Communications as CEO, president and COO respectively. Within six months, the Duffettes, as they have become known, had reorganized their company's operations to reflect their take on their predecessors' vision. They tripled their client base and the Duffeys left town to pursue other interests.

No, this is not the approach espoused by succession planning professionals. Despite the smooth transition, some of the Duffeys' tactics have made theorists gasp.

Indeed, there seem to be two tales of succession planning: the theory and the reality. Just as few businesses become successful by following a textbook, few successful business owners plan for their succession as the pros would advise.

The textbook version incorporates succession planning within any company's very first strategic business plans, certainly by the time a business has operated in the black for two or more years, and hopefully while owners are in their 30s. The plan should span 10 or more years and should be fluid, with room for young relatives and unexpected talent to enter the business and for the business environment to evolve.

You are not alone if you haven't followed this protocol.

The Road Not Often Taken
In the 2003 Women in Family-Owned Businesses report, professors at Babson College in Boston revealed that 38 percent of women owners older than 60 thought they would retire within five years but only 49 percent had named a successor. In contrast, the same report also notes that only 40%  of male owners planning to retire had named their successor. These finding are based upon the 2002 American Family Business Survey conducted jointly by MassMutual Financial Group and the Raymond Family Business Institute.

Chances are you haven't planned for stepping down because you've been busy bringing your product or service to market and building your client base. That's why you have that net profit to begin with. In fact, few business owners seriously consider a succession plan before they are in their 50s and plans tend to be of the five-year variety.

Still, there is much in the Duffeys' model that experts do applaud. For one thing, their style of succession matches well with the creative, entrepreneurial spirit of their firm that had attracted Fallin, Taylor and Large there in the first place.

In their own way, the Duffeys also followed the experts' number one rule: Determine who will take your place before worrying about the "how" and the "when."

"When succession doesn't go well, it is often because the company falls into the hands of someone without training across the company, someone who does not know all they need to be successful in their new leadership role," notes Ann Evangelista of Corporate Psychology Resources (CPR), human resources management and development firm.

"Any company where leadership will change and you want the organization to continue beyond you, you have to think about who will be in your role when you can't be. Then you decide how to prepare that person."

Determining the "who" is a three-step process:

¥ Develop an ideal model, a mixture of personality, skills and background required to take over not only the top position.

¥ Reflect objectively about whom inside and outside the organization would be most capable.

¥ Measure possible candidates against your ideal model.

The most qualified candidate for the moment may not be the candidate (daughter, cousin, protégé or prized employee) you really want to see at the helm down the road. That is why the sooner a replacement model is developed, the sooner plans can be made to develop the best leader. Those plans could include summer jobs or internships, external experience, leadership training, business school or other graduate programs to maximize the effectiveness of key candidates.

For Donna Buchanan, president of Junior Achievement of Georgia, using CPR's analysis led her to an unexpected conclusion. When she began a search to replace the non-profit's vice-president of marketing and development, Buchanan decided to look for someone with the potential to replace her in five years or so, though no promise has been made.

"To be president of JA, you have to be a strong fundraiser because we have to raise about $3.2 million annually and receive no government funding," she explains. "After putting eight people through the process, I wound up going with someone with little development training - which I can give - but with crucial personality traits that can't be taught, such as high motivation, high intellect and good people skills."

The Duffeys began their informal talent appraisal about five years ago. Naturally keen on the development of all their employees, the Duffeys zeroed in on three women who had risen to the top.

Taken together, the Duffettes incorporated essential strengths in new business development, client relations and operations. "We underwent on-the-job training but didn't know it," notes Taylor. "We each were already strong in our own areas but didn't then know enough across the entire business."

This approach meshes well with studied leadership transitions nationwide.

"We are finding anecdotally that companies that do the best job of succession planning also do the best with development programs from low-level employees on up," says Jan Shubert, associate director of the Center for Women's Leadership at Babson.

The Duffeys followed other recommended tactics in their succession planning as well:

¥ Discuss general ideas with trusted advisors, including lawyers, accountants, financial professional.

¥ Get recommendations for advisors from others in your business.

¥ Find out how others in your business are addressing succession issues (trade associations and industry gatherings are often a good place to start).

¥ Consider whether your business can be sold.

¥ Don't insist on a replica of yourself; that may not be the best formula for growing your business to the next level.

¥ Realize that the succession planning process is a fluid one. Your business, its outlook, your needs and the people involved all have a tendency to change over time. And yes, the Duffeys had a back-up plan in case "The Duffettes" declined their offer.

¥ Engage in active and continuous strategic planning. As you develop a long-term business plan for your company, you are inadvertently considering the issues of succession.
 
Experts also suggest that owners find an objective, outsider perspective of their business. This may be a succession planning professional or an advisory board. A view from a step back can provide new insight, some of which you may at first reject.

"This often occurs in family businesses, when a succession planner may notice family dynamics or nuances in leadership style that a CEO may not," notes Mary Bickers, president, Bickers Planning Solutions LLC.

In fact, owners of businesses who want their family to retain control and leadership often face the most complicated challenges because of family hierarchy and emotions, as well as often-invisible company politics. Sometimes the best successor is not a relative, or the next generation may not have the same passion for the business. Other times, relatives who are not good choices for leadership can still play other pivotal roles in the business.
 
Like the Duffeys, the 57-year-old owner of a Georgia-based accounts receivable management firm did not pinpoint a succession plan until he began to consider retirement. (Several individuals interviewed for this article did not want to reveal their names out of concern for divulging confidential plans.)

In this case, one child was interested in running the family business, and one was not. The older generation was particularly concerned about avoiding the mistakes he had witnessed in another family's business when an inexperienced son stepped into a leadership position.

"That child walked into the business without experience and without the respect of the non-family employees. They felt he had gotten his job because he had chosen his parents well. A lot of avoidable difficulties arose as a result," says the owner of the 35-employee national firm.

How well current employees accept a new leader is critical, Bickers agrees, because the success of any new leader often depends upon a strong management and support team. She encourages clients to use a confidential survey she develops to gauge the attitudes of existing employees and management toward succession candidates.

"If you get this insight early enough, you have time - preferably years - to work out those issues and develop a positive track record," says Bickers.

Key employees will naturally be concerned about the impact on their careers and their futures. If you want them to stay on, you need to think about those things as well."

Incentives to keep employees motivated may include performance bonuses through the transition, added responsibilities and compensation or various stock arrangements, she suggests.

As for the accounts receivable firm, "we believed our son needed to earn his wings elsewhere, get experience in business whether related to ours or not. It was important that he prove himself to himself, as well as to others," its president says.

After seven years, that son joined the family business. A plan with a timeline was developed to broaden his skills in operations to include the dynamics within the business, as well as develop a salesman's rapport with customers.
 
The plan also protects the non-participating daughter's financial interest in the firm. "For family businesses, strategic planning and succession planning are also all interconnected with estate planning and wealth management," notes Bickers.

There are a handful of succession planning issues about which there seems to be little agreement but which every decision-maker must consider, including:

¥ Define the post-transition role of the past leader. Many past presidents take the advice of experts and remain at least semi-active in their company for months or years. They may take on narrowed responsibilities or serve as an on-site consultant. The Duffeys, like others, took a different route: they left town shortly after their transition, though they make sure the Duffettes can reach them at any time.

¥ Let potential successors know they are being groomed. Although succession should not be promised too far in advance, some say sharing the potential plans with top candidates makes them more motivated in their jobs and opens them to career advice.

Conversely, Nichole Taylor of Duffey Communications says she appreciates that she was kept unaware. "I think knowing you're being groomed to takeover could add pressure and weight to every decision because it's a lot to live up to. There's also the staff to consider. If the training process is lengthy and everyone is aware, I think it can add a lot of stress to office relationships."

¥ Determine the size of the candidate pool. For companies with 50 or more employees, many experts advise that three candidates be considered and developed for each leadership position. Others worry that such pools can engender a competitive atmosphere that is not healthy for many businesses.

Despite the divergence between the textbook process and the practical considerations of day-to-day business, succession experts and CEOs agree on one thing: develop your succession plan one step at a time. It should evolve, just as your footprint on your company did.