GT Succeeding at succession: identifying and engaging successors Canada
Succeeding at succession: identifyingand engaging successorsDecember 2011Who to choose? That is the nobody has the right skills to take control. to make decisions that could damage or The consequences are predictable enough: destroy a business.question facing an increasing a business that took years to build begins Family dynamics also create emotionalnumber of individuals to crumble because of low employee challenges. If several children are activeseeking to transfer ownership morale, strained family relations and in a family business, it can be difficult declining performance. to objectively evaluate each child’sof a privately held business. Then there are the business owners capabilities. Not to mention having toThe first decision is deciding among and managers who come to grips with tell a child that they are not in line forthree options: selling, passing ownership succession planning, making thoughtful, succession or trying to make sure that alland management to family members, or strategic decisions through the process children are treated fairly.allowing family to retain ownership but of identifying and selecting a successor. Sometimes, perhaps selfishly, parentsnot management. According to a Grant What’s their secret? They take time to want to transfer the business to theirThornton International Business Report, develop and implement a succession plan children with instructions to maintain43% of business owners choose to pass that identifies a successor with appropriate its vision and strategy. Children areownership to family members or sell to skills, communicate responsibilities to often reluctant to do things the same oldemployees.1 all stakeholders and compensate their way—a tendency not lost on most parents. While privately held business owners successor fairly. They also recognize that Indeed, some parents may consider thisand managers are usually adept at dealing every position in an organization needs determination to do things differentlywith change, the same cannot always be a successor, and that finding a successor an unacceptable risk to the familysaid for identifying and grooming their isn’t something that starts and stops. It’s legacy, leading to a search for an externalsuccessors. Why? Because they worry ongoing. candidate who is prepared to maintain theabout how the business will fare after status quo.their departure. They are concerned Keeping your emotions in check It’s not just owners who faceabout meeting the needs of managers Identifying a succession candidate from psychological challenges. The nextand family members who are not in line among people you know, such as family generation may consider leadership andfor succession. And they are afraid of members and employees, may limit equity ownership a birthright, which cancompromising personal relationships the number of choices, but it does not lead to disappointment and frustrationor creating irreconcilable family rifts. eliminate the psychological challenges of if what they believe is meant to be neverOverwhelmed by worry and fear, they choosing a successor. happens. Moreover, some children dislikelet their emotions get the best of them, Many owners start their business so taking orders from parents or employeesmaking poor decisions or the wrong they can take control of their lives. When because they see themselves as the ownerschoice altogether. Others postpone the it’s time to let go, and lose control, they ultimately.inevitable, clinging to the notion that are understandably reluctant to hand the reins to someone with less experience. It’s1 Grant Thornton International Ltd, International Business never easy giving someone the freedom Report 2009, www.internationalbusinessreport.com
Notably, these emotional challenges can The next step is to establish an open persist long after a successor is chosen. dialogue with the candidate to determine No matter who you choose, your what he or she really wants. Those successor and his/her skills will inevitably conversations can lead to the realization be questioned by family members or that the person isn’t prepared to upgrade employees. You can keep everybody’s his/her skills or consider leadership emotions in check by: under any circumstances. Sometimes this • identifying the skill set needed to run screening process is best handled by a the business facilitator who can assess skill sets, identify • providing your successor with gaps and hold candid conversations to find sufficient training to support continued out what really interests the individual. business growth The aim is to have your successors • designing a compensation package to pursuing their true passion, not to have reward performance them say “yes” because they think that’s“Business owners are • communicating the roles and what you want to hear. This is particularlygenerally self-directed responsibilities of your successor to important with children. stakeholders The process of identifying candidatespeople who like to be in within your family can be less structuredcontrol. Letting go can Identifying your successor and start much earlier. Informal chats withbe extremely challenging Sometimes it’s obvious—the employee young children can help to explain the or a child is such a natural. Or so you family business and its objectives as wellfor them. Ultimately they thought. Your choice for a successor as its importance to the family. If theseneed to give their potential may seem clear, but there’s a danger in conversations generate a spark of interest,successors the opportunity assuming that an individual is interested in then you can take steps to get your ownership or leadership. And even if the children involved in the family business,to make mistakes. It’s the person is keen, he or she may not be right even if it’s just casual weekend work.best way to learn.” for the job. If there’s little or no interest, it doesn’t The first step is to identify the skills matter. What counts is the reaction andJol Hunter that your successor needs to run the knowing where you stand. You can alwaysGrant Thornton LLP, Canada business. Determining those skills can be revisit the idea later. made easier by establishing or confirming Keep in mind that choosing your the long-term goals of your business. For successor involves more than finding a example, it requires a different skill set to new leader. You’ll also need to consider hold the course for a business than it does senior management positions that to transform or reinvent it. The key is to are equally important to maintaining understand the drivers of the business and continuity today and in the future. to put its strategy and the organization of the firm first.
Grooming your successor them to work in functional roles in yourOnce you identify a potential successor, business or to gain experience outsideyou need to develop a skills-related the firm. Regardless of where they start,succession plan, one that is aligned with leadership roles for your children shouldyour timeline for retiring or winding down be considered only when you believe theyyour involvement. This training may are the right people for the job.seem unusual for business founders who Judging your successor’s leadershiphad to figure things out for themselves. ability is a key decision point in theBut a thriving business is also an excellent grooming process. You may be able totraining ground for developing leadership develop leadership, but if your successorskills, understanding the nuts and bolts of lacks it, he or she may never be able to stepthe organization and acquiring the myriad up. So be open and honest with yourselfskills to assure a seamless transition. To be and your candidate in this regard. If iteffective, the succession plan must provide becomes apparent that the person isn’tfull details on requirements for education, right, don’t hesitate to recruit someone “Owners need to begin byexposure to business operations and levels else. expressing the attributesof competency. Your candidate must Identifying more than one potentialunderstand and accept these requirements, successor isn’t unusual and has its benefits. they expect in a successor.and the company’s culture and values. Although several candidates can create They must also understandA mentor or executive coach might also problems, it avoids pinning your hopes that it may take several yearsbe considered to help implement your on one person, only to have them fail toplan, guide your successor’s training and live up to expectations. Whether your for an identified successoraccelerate his/her development. candidates are family members or staff, to cultivate these. You need As your successor’s skills and you’ll need clear job descriptions, career time to identify talent gapscapabilities grow, involve him or her paths and appraisal reviews to prevent people tripping over each other while and close them if you hopein business decisions, the board ofdirectors and industry associations. These vying to become your successor. You’ll to leave the business on solidactivities demonstrate that your successor also need to articulate the criteria for footing.”is engaged in and contributing to the choosing your successor.business, and will build confidence in your Still, mistakes happen—the wrong Laurent Prost Grant Thornton, Francecandidate throughout the organization and person is selected or the needs of thewith stakeholders. business change. A family council or In some family businesses the children board of directors can reduce that risk byare born ready. But ready or not, there are providing oversight during the early yearsstill things to learn before they take over of succession and assisting with futurethe top spot. Depending on the children’s succession planning.experience, it may be appropriate for
Designing a compensation package The majority of business owners “Identify your successorsMost entrepreneurs succeed through have their personal wealth tied up in thedrive and determination. You want your business. So make sure you extract value early. Train them. Make suresuccessor to embrace similar values, while from the business before you leave. The you have true incentives toensuring that he or she is paid fairly and last thing you want is to be dependent on reward them. And when it’smotivated properly. So, better to link your children for an income in retirement.your successor’s compensation to moving An effective compensation plan for time to hand over the reinsthe business forward, not to moving into your successor ensures that: of ownership, step back. Ifthe corner office. That means tying the • remuneration is market-based you don’t demonstrate trustcompensation package to objective metrics • annual performance reviews are in the successor you select,and aligning it with industry standards. conductedThe criteria for rewarding performance • bonuses are based on objective neither will your otherand the consequences for failing to meet performance criteria stakeholders.”objectives must be completely transparent • employment rewards are separatedand followed without exception. from ownership rewards Bernard Doherty Grant Thornton, Ireland For your management team, it may • job descriptions or service contracts arebe necessary to offer equity ownership in place for all company executives.or a profit-sharing scheme to provide anincentive to facilitate the succession rather Playing fair to avoid conflictsthan undermine it. Management will feel Let’s face it. Not everybody gets to beless threatened by your succession plans king or queen even for a day. Most peopleand more inclined to increase the value understand and accept that reality. So theof your business if they are rewarded for more pressing issue after you identifygrowing the company. a successor is to play fair with the rest Compensation plans for a family- of your family and employees. Yourowned business can get complicated. selection will be easier to understand andYour successor’s compensation should be accept if you express your wishes clearlyperformance-based and tied to a transition beforehand and manage expectationsplan that gives them control and decision- throughout the transition.making responsibility. Children who were As for control of the business, wenot chosen as your successor need to be recommend that one person receivestreated fairly and shown how they can majority control to avoid deadlocksmake a difference in whatever role they between equal owners. If this decisionplay in the firm. For those not actively isn’t perceived as fair or handled withinvolved in the business, you may need to sensitivity, the family may be divided byconvince them that fair doesn’t necessarily irreconcilable rifts.mean equal.
Consider this: the success rate for • has the CEO, founder or majority involved stakeholders with managementthe transfer of family-owned businesses shareholder set up a viable equity authority can confuse business decision-to the first generation is just 30%. By structure to ensure a smooth making and often result in a recipe forthe time the second generation takes the transition? disaster.reins, the success rate drops to 15%. The As you make these arrangements it’sthird generation has a mere 5% chance Consider these questions if you own a important to clearly communicate yourof success. Why? In 80% of the cases, family business: succession plans throughout the process.the business failed because of family • do family members working in the The last thing you want is to surprisedynamics.2 business have the necessary skills to people. By discussing your plans openly perform their jobs? and early, you and your employees canAsking the right questions • do the owners want their children to work toward a common goal of buildingExperience tells us that the companies work in the business? your business under new leadership in anthat survive leadership and ownership • do they know what their children’s organization structured effectively for thetransitions are the ones that are run like aspirations are? next stages of its life.a business, no matter who owns it. You • do the children want to work in the To help ease this transition, it’scan prepare for succession planning by business? important to work with experiencedanswering the following questions: • is there an education policy for family specialists who can help you put programs• is the business dependent on the members? in place to achieve your succession current management team? • are family members expected to gain planning goals. Grant Thornton LLP• is there a training plan for successors? relevant outside experience prior to can help. From estate and tax planning• are there predetermined criteria for joining the firm? to transaction advisory and wealth selecting the successor? • is family involvement in the business management, we can help you build• are there adequate safety nets to reduce positive? an effective transition strategy. With the effects of mistakes made by the • are there mechanisms to resolve our global reach, proven track record, successor? conflict, such as a family council? integrated suite of services and in-depth• is there a contingency plan? • is there a shareholders’ agreement? knowledge of privately held businesses,• is there a timeline for handing over our practitioners truly act as your trusted control? Making the most informed choice guides to help you navigate the succession• are career paths for other executives Selecting and grooming a new successor planning process. mapped out? can be one of the most challenging To find out how our professional• do we have the right skill base in the tasks of a business executive. You can advisers can help you identify and new management team; what gaps need smooth the transition to new leadership motivate your successor(s), contact your filling? and ownership by treating minority local Grant Thornton succession and• what will the CEO’s role be after shareholders equitably. This might include estate planning specialist. retirement? How about the role of a division of assets, a share of profits or potential heirs? a family trust, but it should not include management control. Providing non-2 Fast, John, the Family Business Doctor (Waterloo: Family Enterprise Solutions, 2007), 36.