(Editor's Note: You can read part 1 here.)
You are ready to relinquish control of your business to a successor, and even trust the new leadership to provide a cash stream to help you sustain your standard of living during retirement. You have determined when you want to leave. Now, who should run the business? Until you have a chosen and groomed a successor, you won’t be sure of who will take over, which may jeopardize your legacy.
Succession planning can be defined as “a program or system designed to ensure leadership continuity for all key positions, through the development of internal personnel talent.” Experts recommend that the succession plan should take at least three to five years, and perhaps a decade, to implement effectively.
Will your company survive with a plan? One construction CEO decided to test his staff by calling the office one morning, announcing, “I’ve died. Run it without me.” He then spent the next two months in Hawaii, incommunicado. His business survived, but this “train wreck” method of transferring control is devastating to morale and financial stability.
A successful leadership transfer is nearly imperceptible, like passing the baton in a relay race. Preparation is crucial. Preparing a succession plan begins when you decide what your legacy will be.
Do you want to ensure continuity, perpetuate or raise performance standards, retain key employees, enhance the value of your company? Will you allow new ideas and welcome new energy during the transitional period? The strategic business plan must be coordinated with your personal estate plan, and you and your family must be assured of financial security. In a family business, you may want to create a family mission statement that establishes a direction for succeeding generations and also defines the legacy your family will leave to the community.
Don’t confuse succession planning with replacement planning. A replacement plan will buffer you in a crisis or in the case where you are unable to fully implement your succession plan; it’s a reactive, crisis-oriented contingency plan. A succession plan is proactive and development-oriented.
Starting by creating a replacement plan will force you to organize the details, such as writing formal job descriptions, designing an organizational flowchart showing the backup person (think understudy in a theater production) for each position and setting parameters for evaluating performance. Once you have defined these structural components, you can expand by creating career paths for individual staff members and positions, and then establish training schedules and budgets to fill gaps in skills.
Include your employees in creating the replacement plan; they know what it takes to perform their jobs, and what training they need. Also, implement a company-wide mentoring system, to make sure every member of your staff has someone to help with navigating both formal procedures and the informal corporate culture. Mentoring is a key element that contributes to successful performance and advancement at all levels.
Management support is critical for successful plan implementation, and the plan will make no sense to employees unless it is aligned with your current corporate strategy, so make sure you clearly identify your future vision so that all employees, and especially your future leaders, will align their strategic and operational decisions accordingly.
Now, how do you identify and develop future leaders? Start by recognizing exceptional performers, but remember the Peter Principle—people tend to rise to the level of incompetence, just beyond their level of greatest expertise. There are many sad stories describing effective department heads or financial officers who just couldn’t make the final leap to CEO. You are not only judging present performance, but predicting the ability to expand the repertoire of skills to the next level.
Make sure you are committed to invest in the development of potential successors, and make sure every position has someone cross-trained to provide backup if someone leaves prematurely. In small companies or family businesses, key employees may become discouraged if they see limited advancement opportunity. Be prepared for resistance from those who may feel they were overlooked, and make sure you document and evaluate performance at all levels. Communicate criteria, career path information and your timetable to everyone in the company, and define your expectations clearly.
Though the replacement plan should extend throughout the structure of your company—so that every position has a potential backup to step in—the most important and most difficult choice will be your own successor. Do you want someone with the same strengths and weaknesses, the same vision and the same attitude as yourself? Or, do you want someone who will be able to make decisions you are unwilling to make, if the company must change direction to meet future market and technology challenges? At some point, your successor must become privy to information only you possess. Will you be able to release this information?
Since most electrical contractors must fit the profile of an entrepreneur, consider whether your choice has these characteristics:
- Enjoys risk and promotes change
- Is independent
- Is a first-born child
- Had his or her first job by age 15 and is 28–35 years old
- Is in excellent health and has lots of energy
- Enjoys authority
- Is a consensus builder and problem-solver
- Is decisive and results-oriented
- Is trustworthy and dedicated
- Has participated in non-team sports
Some CEOs choose several potential successors and create a competition over time for the position. This allows candidates to work in different positions throughout the company, and demonstrate competence in many areas, but it can create resentment and conflict, especially in family businesses. It may be better to give your candidates a task to work on as a team, such as analyzing whether to break into a new market niche. You can watch how they work together, and evaluate not only relationship skills but also the results and their ability to analyze policy decisions. When you choose one final successor, you already have a potential top management team in place, and you know whether they work well together.
Once you make your choice, concentrate on preparing your candidate. You want to affirm your successor’s rationale for joining your business, business plan and vision, personal training and development plan, and knowledge of company history, philosophy and strategy. The candidate should be involved in your industry, be assigned a mentor and perhaps participate in a leadership peer group, and have some outside work and leadership experience. Also, identify the areas in which your successor needs to develop skills and contacts.
Of course, the earlier you make your choice, the more time you will have to develop the capabilities of your successor. Also, decide whether you will receive input from employees, advisers, your board of directors or shareholders before finalizing your selection. The broader the range of support during the process, the easier the transition will be for the new leader. Be sure to introduce your successor to stakeholders, such as lenders and sureties as well as key suppliers and customers, and verify that they support the choice.
Your written plan will include a timetable for transferring control, including a final date for your exit. The training and development schedule, financial issues related to your estate and management compensation, stock ownership agreements and any adjustments and incentives for family members or key employees who will not have a place in the administration all need to be addressed.
How do you know when the successor is ready? Your candidate already has the education and work experience, has demonstrated performance and responsibility in your company, and should have been accepted by stakeholders. He or she should be able to think strategically, have leadership experience outside of the company, be able to balance any personal or family issues, have a strong corporate vision and be eager to communicate a strong commitment to its success. If you also see well-developed business and financial judgment and have made sure the successor has a financial stake in the success of the company, it is time.
Just make sure that he or she wants the job. Sometimes, the successor is identified only in the mind of the current owner, who is then rudely surprised when the candidate suddenly quits to become a competitor. In one such case, when the CEO asked, “Why are you leaving? I was going to leave the company to you!” the shocked employee replied, “You should have told me!” Failing to communicate the plan is just as devastating as failing to plan.
Now you have an exit strategy and a succession plan. In Part 3, we will review your options for ownership transfer.