The Art of Succession Planning: Developing Talent
Posted 6 years ago on · Permalink
Business owners work hard in their business to accumulate wealth. At some point, owners make a decision to step aside and retire. Deciding to cash out and remove themselves from the business initiates a series of activities. They typically approach a trusted advisor looking for information on selling their business. This sets in motion appointments with business valuators to establish a sale price; accountants to strengthen financial statements and mitigate tax; lawyers to optimize their legal and tax structure; and financial planners to maximize wealth building after the sale of their business. Once this has been worked through, owners put the for sale sign up. This is succession planning… or is it?
Value vs. Valuation
Through the lens of an owner, the business is being passed to the next generation, whether that is family, management or third party. They see this transition as the next generation’s turn to lead the business. Passing the business to the next generation is the theory of succession planning. However, if owners have not prepared the business and the next generation for a change in leadership, the full value of the business will not be realized.
Purchasers pay for profitable businesses that can withstand a change at the top. In the event management, employees or the business is not ready, negotiation will be limited to the sale of an owner’s accumulated assets which significantly discounts goodwill and market value. In this instance, succession planning simply becomes a divestment of asset. This is akin to selling a used car. Without any goodwill value, the sale of a business is a depreciation calculation. A sale is the final step in succession planning for an owner but not for the business!
Let’s consider www.dictionary.com definition of succession…
1. the coming of one person or thing after another in order, sequence, or in the course of events.
2. a number of persons or things following one another in order or sequence.
3. the right, act, or process, by which one person succeeds to the office, rank, estate, or the like, of another.
4. the order or line of those entitled to succeed one another.
5. the descent or transmission of a throne, dignity, estate, or the like.
6. Also called ecological succession. Ecology. the progressive replacement of one community by another until a climax community is established
The operative word here is ‘succeed’! Succession planning is passing along the success formula of a business to the next generation. The formula is a recipe that directs and motivates employees on how to compete and generate wealth for the business. Talent’s ability to perform, work together and support others shows off the assets of a business and increases its value. This is goodwill and is the subjective measurement in business valuation. It is the emotional component that ups the ante in a sale.
Taking time to document the success formula and build teams around it, is critical for maintaining a healthy and valued business in the marketplace. Market value, as a general rule, is quantified by profitability and qualified by brand equity. This, as a general rule, equates to business valuation which is profit multiplied by goodwill. A robust success formula denotes this equation and guides leadership in quantifying and qualifying what it values. It establishes the parameters for building wealth and creating a succession plan that preserve it.
At the highest level, a success formula guides decision making for a business. It supports leadership in directing and motivating employees to acquire and protect the things and behaviours it values. Seeking what a business values in the marketplace is the primal step that allows a business to survive, whereas, succession planning is the process of passing along the success formula onto the next generation. This is sustainability and legacy at work.
Effective succession planning does not start when owners decide to retire. It starts when owners want to grow their business and hire talent. At that moment, when talent is added to the business, succession planning begins. The owner’s success formula must be imparted on new employees so they think, act and behave according to the values of a business. Having shared values and championing those values are what make a business successful.
Selling a business is not only the final step in succession planning, it is also the renewal point of a business. It represents the life cycle of a business. Documenting it, is succession planning.
Ownership that develop employees to adapt, be creative and work as a team will be rewarded financially and for a job well done. They leave a legacy. Knowing that the business is in good hands make retirement easier and paves the way for their success formula to live on. A leader’s greatest virtue is ensuring the next generation is as successful, if not more successful than they were!
Succession planning is not just about retirement, it is about making sure the business is well looked after so employees continue living a way of life. Following a sound succession plan not only increases the value of a business, it also makes the business a great and productive place to work. Succession planning is more than getting business valuators, accountants, lawyers, financial planners to prepare the business for sale. It is about preserving the success formula of a business and passing along the skill, knowledge, passion and wisdom onto the next generation so they succeed.
Jeff Kropman is the principal at KRO Performance Management. KRO Performance Management works with business owners to achieve the business results that they want. We coach owners on optimizing their business through performance values, growth values, managing results, succession planning and celebrating success. For more information, contact www.kropm.com