You have to love entrepreneurs and the skills, strengths, aptitude, and attitude that enables them to risk everything to build something. Having worked with leading visionaries who are true serial entrepreneurs for nearly three decades, I can honestly tell you that without them, our economy and society would not be nearly as vibrant, growing, and diverse.
However, a couple of their key qualities can, in the long run, actually end up hurting the very entity they have founded if not managed correctly. To put it bluntly, far too many entrepreneurs lack the delegation, mentoring, and personal development skills that are so vital to help a business reach its full potential. This is not a knock on this group. Rather it is simply an observation that their leadership strengths, decision making skills, and vision often run counter to one fundamental dynamic: eventually a successor must be groomed. This is a reality far too many business owners put off.
One of the most important roles we play with our clients is to help them analyze their businesses the way buyers do. A key detail that buyers review when looking at any target is this: If the seller is not going to stay long term after a reasonable transition period (usually 1-3 years), then has an internal replacement been groomed? Is there talent in middle management to assume a CEO role? This is especially critical if the company is dependent on the current owner for most (if not all) important decisions.
I recently had the opportunity to participate in a CEO Briefs webinar entitled “Best Practices for Creating a CEO Succession Plan.” If you are not familiar with them, CEO Briefs (a service of the Financial Times) “is an exclusive knowledge network for career-driven thought leaders. As the leading publisher of professional on-demand resources for senior executives, [they] strive to eliminate career roadblocks, sharpen principal skills, and continue to educate top leaders on hot topics impacting their profession.” They do a tremendous job focusing on providing relevant educational materials that pertain to critical C-level issues.
This particular webinar was led by Aaron Sorensen, Ph.D. with Axiom Consulting Partners, an internationally known business consulting firm. Sorensen is considered a leading expert on CEO succession planning, and I found his information timely and informative. It was an hour-long seminar so I won’t be able to cover all his information. A few of his points were extremely informative and important for CEOs to consider:
Each of these points is critical to consider, especially if you are planning to sell your company during the next couple of years.
First, you need to see the development of a successor as a financial investment in your company. Far too many business owners do not. Sorensen is right; if you don’t find and groom a replacement, buyers will view that as a risk, and any perceived risk will impact your ultimate valuation. Consider the financial consequences as you weigh the cost of creating a successor.
Secondly, let’s address how family plays into it. Based on our years of experience, succession plan creation for privately held companies is even more complex given inter-family dynamics and the raw fact that sometimes a family member is the worst person to identify as a successor. Buyers often view that as a risk as well. It is vital to look for the BEST talent, not just the next family member in line to assume your role.
Be sure to assess your potential successors as scientifically as possible. This means you need to expose them to all facets/departments of the company and see how they handle issues and people. Track their progress, document it, and use what you see as performance to make your succession decision.
And most importantly, as Sorensen so accurately points out, a successor needs to be identified who has the skills to take the business to the “next level,” not maintain the status quo. The quote from Marshall Goldsmith is so on point. If you look for someone exactly like yourself, you may be short-changing the company and any future owners. The skills to start a company are not the same as those needed to take a $5 million company to $25 million and beyond.
Now some of you are reading this and saying, OK, sounds great but I don’t have the time to identify and groom a successor because I am too busy running my company. Well you just explained why you NEED to do so if you want to build a buyer-ready business.
And even if you own a smaller company, it is still possible to develop a successor. Don’t over-engineer this process. Groom the person in your organization you believe can replace you, and simply delegate a few minor decisions to them. See how they think, how they communicate. If they do well with minor ones, move up to major ones and review their decision-making process. Finally, if they pass this test, examine their leadership potential. Can they communicate? Do they have the respect of their peers? If you are gone, will they be able to work well with a new owner(s)?
So keep this as simple as you need to but most importantly do not put this off. As Sorensen so correctly points out: “Poor CEO succession planning can erode value in a much shorter period than other competitive threats.”
This is especially true if you are trying to build a buyer-ready business!
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.Karen S. Williams, CFO, BW Manufacturing
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.Terry D. Wickman, President, Keytroller
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Terry D. Wickman, President, Keytroller
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.Jay Dinnison, Owner of Sharpe Mixers
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.Andy Graham, Vice President, Modern Heating & Plumbing
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.Pete L.
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”Karen S. Williams, CFO, BW Manufacturing
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.Robert Evans, President and CEO of Mealtracker Dietary Software
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!Andy Graham, Vice President, Modern Heating & Plumbing
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.Larry Moore, Owner, A Company Portable Restrooms
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.Robert Evans, President and CEO of Mealtracker Dietary Software
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.Michael J Polarek, President, Paragon Packaging
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.Michael J Polarek, President, Paragon Packaging
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