Source: Retail Leader Magazine Interview, April 28, 2015

Why is succession planning important?

It allows you to shape the future for your company and your family. Even with the best-laid plans for retirement, injury, disease or death could strike at any time. That is when you need the help of professional management.

When should a company start succession planning?

Succession planning can start from the beginning. One key question to ask when forming a new company is: “How will it fall apart?” That is, if things go wrong, how will the founder and his partners move on? It is best to have these discussions early, before there is a perception of “money on the table.” That takes the pressure off, rendering succession planning much less emotionally charged.

But, better late than never. A late succession plan still trumps the default succession plan: forced sale of the company.

Who should be involved in the process?

Owners of the company, leaders of the company, key board members, leaders of the family, and a moderator. It is better to include more members of the management team and family because if they participate in the discussion, there is more likely to be accord when the plan is implemented. That is vital because implementation time could come at a crisis point for the company.

What are some common problems privately held companies have with succession planning?

There are usually two key things lacking: communication and planning for the unexpected, or modeling. When there’s not enough communication, the board may not know details of the owners’ estate plan, and how they affect the concentration or break-up of voting control. The fiduciary nominated in the estate plan might not know the role that he will play in the selection of the new professional management of the company.

A lack of modeling means there is no “dry run” of the succession plan. That can lead to errors in implementing the business plan, the estate plan, the financial plan, or the asset protection plan. Unfortunately, these problems are often not discovered until it is too late.

How can these problems be avoided?

Take a few simple steps.

First, review the current succession plan. This shows what preparations are—and are not—in place. It can also highlight arrangements that should be better coordinated.

Second, do a dry run of the succession plan under a variety of conditions. These conditions should be what are possible, based on the trends inside the business and outside the business—not just what is most likely to happen. Even a company in an industry where change is gradual and predictable must plan for what happens if there is a sudden need for professional management due to forces from the inside (death) or the outside (market change).

Third, create plans based on the possible scenarios, and tell key people about these plans, so that they can react correctly in times of emergency. The plans tell management and outside experts what their role is, what they should be ready for, whom they are working with, and what the common goal for the organization is.

Finally, review and update periodically.

What steps can an owner take to smooth the transition to an outside CEO?

First, record how things work at the company. A professional manager’s first instinct will be to “kill the sacred cows”—that is, eliminate non-standard practices that family companies often employ. But some of these cows serve a very useful function. A good blueprint early on could save a lot of time and energy later.

Second, start regular communications with the new CEO. This will set the expectation of how and when she will communicate with the family. It will also give her access to the company’s institutional memory, an invaluable resource.

Third, make sure the financial interest of the CEO is tied to the company’s goals. But take care to structure the financial incentives so they do not threaten control of the company or inhibit getting access to capital later.

Fourth, draw the new CEO into your social and business community. This means ensuring that she is on the ground, communicating with employees and clarifying changing roles as new methods are adopted. The professional manager can’t parachute in once a month.

What’s the role of the board and other top executives in this transition?

Most boards begin as an advisory body, giving the founder and family access to expertise and experience. As part of the succession plan, the board will take on an executive role. It will oversee the CEO and hold her accountable for her actions. A strong board is critical, because it will be deeply involved in top executive matters, as well as business strategy.

The board will develop and implement a process for running the company’s portfolio, including when to reinvest for growth, when to seek outside capital for growth, as well as when to pursue growth through mergers and acquisitions, and finally,  when to achieve it organically. The board executes the succession plan, and does modeling to show when the plan will not work, or could work better.

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