Begin by writing down your thoughts about when you want to step away from the daily operations of the business.
- Would you like to spend more time with your spouse?
- What do you want to accomplish over the next 15 years?
- How much money do you need?
- What personal goals could you achieve if you weren't running the company?
- What would success in a new endeavor mean to you?
Next, discuss your ideas about the future with your family, senior management team and key employees. Decide how long you want to remain active in the company and in what capacity. If you see retirement as an opportunity to travel, be sure to include that in your discussion as well as where you want to live and what role, if any, you want to play in your community.
At the same time, think about the long-term stability of the business. Most corporations and partnership business agreements spell out what will happen in terms of shares of stock, assets or the buying out of the company by remaining principals or partner(s) if one of the owners or principals retires, dies or becomes disabled. But sole proprietorships often operate without any such legal blueprint.
Once you've established these parameters, begin revising your business plan, assuming you already have one, or write one if you don't. The most effective business plans are prepared by owners in conjunction with their successors. They include any future new products, plans for expansion, growth or new investment, and a candid assessment of a company's current environment and competitive positioning.
This joint business plan exercise will give you an opportunity to evaluate your successor's goals and ideas for the firm, while forcing your successor to think through and write down specific plans for running the operation. In fact, you could use this business planning exercise to evaluate a number of possible successors.
And as your successor is putting thoughts down on paper, you as current owner should be developing a business transfer plan. In it, develop a timeline for starting the transfer of ownership to others. Decide when:
- Control is shifted, i.e., your successor starts assuming some of your responsibilities.
- You successor takes on a major portion of the responsibilities.
- Responsibility for day-to-day operations shifts totally to your successor.
- You will formally retire.
This timeline will also help you determine the length of time you have available to train your successor.
Choosing within the Family
The head of a company has no greater responsibility than identifying a
successor who will be equally or more successful in running the operation.
More often than not, the head of a family-owned operation chooses a
son or daughter as successor. However, it's not unusual for an owner to
have more than one child competent enough to step into the parent's shoes,
making the selection process more difficult. Some owners decide to divide
up the functions, giving each child equal responsibility. That, too, has
its problems.
Multiple successors must have comparable ability, motivation and commitment. You should not confer equal authority, compensation and stock ownership to them if their contribution to the running of the business is unequal. The successors must divide day-to-day job responsibilities according to their individual talents. And, the successors must share a common philosophy about the future direction they want the company to take and must have a history of resolving conflict constructively.
Whether you choose one or more family members to take over, using a grooming timetable increases the chances for a smooth and ultimately successful transition. One model is for the family member to spend the first five years after graduation working outside the company. The next five years would be spent working in the firm, getting the best job experience you can provide. Teach them about the business, but make no commitments in terms of an eventual leadership position.
By then, you'll know if they are qualified and whether the process is working. Once they reach this stage, you start weaning yourself from the business and giving them more direct responsibility.
Alternatives
If you are unable or reluctant to use your offspring or other family
members, you need to set your sights elsewhere. There is probably no more
fertile hunting ground than right there in your own company.
Your most likely candidates will come from the ranks of middle and upper management. Typically, these employees have already received some grooming and have displayed the necessary capabilities for working their way up your organization.
When identifying candidates, you need to ask yourself several questions.
- What are this individual's technical and managerial skills?
- What are this person's strengths and weaknesses?
- What needs to be done to prepare this candidate to step in?
- And, when do I see this potential successor being ready to take over?
Candidate development is a critical aspect of successful succession planning.
