A big question – with the potential for more than several strategies. As I have mentioned previously, owners can elect amongst at least ten (10) strategies, each of which requires thoughtful planning.
So, how does an owner of a closely held or family-owned business start the process to develop their succession strategy? Simply put, they need to first look at the business itself and identify if there are people interested and qualified to succeed them. This is not as easy as it sounds, as there is some significant analysis required to evaluate the effectiveness of this strategy.
Involved in this analysis is the identification of potential successors and determining whether these individual(s) are:
- Interested in ownership,
- Qualified to become an owner,
- Able to purchase of the company,
- Experienced to lead and manage the company, and
- Willing to be trained to become an effective owner.
If there are positive answers to this strategy, it becomes important for the owner to determine a cost for the transfer of ownership and the ability of the potential new owner(s) to pay for the acquisition of the company. There are several options to this acquisition step, including buyer financing, and deferral of future payments (in which case the owner might entertain a contingency plan if the future payments lapse.) If there are not positive answers to these questions, then it becomes important to proceed to another series of questions and discussions.
I’m only outlining one of several strategies to illustrate that developing and implementing a succession strategy needs to be thought out. When I work with owners to consider the hiring of a CEO, assessing this strategy needs to answer several other important questions, such as:
- Will the owner step aside to let someone else run the business?
- Will the owner relinquish her/his responsibilities?
- Will the owner be ok sharing decision-making responsibilities?
- What would the owner be willing to pay a CEO to run her/his business?
- Does the business generate enough revenue to justify paying a CEO to run the business?
As I progress through discussions with a business owner to evaluate this option it’s important to listen and evaluate the comfort level the owner has in developing this succession strategy. I have found that there is never a hard and fast answer to the questions, and often there are answers given that, by themselves, generate more questions that need discussion and resolution.
Importantly, it is important to understand that this analysis is not a simple exercise, as the owner is evaluating these questions based on a lifetime of owning and running their company.
Furthermore, simply asking these questions will not answer questions relative to the operational and financial strengths of the company. It becomes equally important to assess the strengths and opportunities that the existing business has in the areas of operations, finance, human capital, information technology, sales, marketing, management, vendor, and customer relationships, to name a few.
Understanding these strengths and opportunities will assist the owner in identifying the growth strategy for the company working with a new CEO as well as providing a road map for the owner to evaluate the success of the CEO in achieving the aspirations of the growth strategy and in achieving and surpassing the results for the strategy.
As a business owner considers the development of a succession strategy it is important to work with advisors who can lend their professional expertise, including legal, financial, investment, banking, and, yes, executive search. Finding a leader to run a company follows a distinctive process, especially for closely held and family-owned businesses. The choice to grow through the hiring of an executive can be financially and emotionally rewarding.