Succession is a growth strategy

Succession is a growth strategy

When you set a business up, succession is probably the last thing you think about. The first few years are spent in survival mode, then if you’ve made it that far, you get to drag your teenage business through the dark tunnel of adolescence, before establishing it as a credible organisation. Then one day the knees creak as you get out of bed and you wonder about a different life, doing something else and letting someone else do what you do. Your thoughts naturally drift towards selling your business, what it’s worth, who might buy it, if you could actually let it go.

As these thoughts develop several options firm up in your mind; selling to a larger firm in the same market, merging with a competitor or selling to your team. The first two options involve a lot of known unknowns but the last one seems attractive. Pass on the baton to the people you hired. The ultimate validation of your ability to hire, fire and inspire in the pursuit of a great team. They know the business, the history, the customers/clients, suppliers and because you all know each other, you’ll be able to do a good deal for everyone.

Not so fast there my friend. You’ve wandered into a 10 year strategy and your 12 month timeline can’t make it work. Here’s a few reasons why.

You feel you know your staff well. You don’t. Sure you might have met their partner, maybe even their kids. You know what sports they’re into, how they take their coffee and their ideas on macroeconomic policy, but you ask them to buy a chunk of your business and see how they look at you like a complete stranger. You don’t know the first thing about their hopes and dreams, what they are working towards, their personal balance sheet or creditworthiness and these are the things that matter in this situation.

You can’t answer their (reasonable) questions. How much equity will you sell and when? Will the shareholder agreement allow for one vote per officer and shareholder matters in line with ownership? What happens to your wife’s shares? When are you leaving completely? Can we sell the business, once we own it? What if we want to leave once we own the business? The list goes on and on.

Your senior team are not leaders. There are some people who are natural leaders and others who need time to develop into the role. A quality senior team should be packed with highly functional executors, who have the capacity to lead in future. Thing is, the transition from functional executor to leader is a tricky one and rarely fits the same timeline as your exit.

You can’t afford to earn less now. If you sell some equity to the senior team now, you will own less and therefore have a lower dividend distribution. Sure, you could grant yourself a bigger basic salary, issue some distribution only shares or similar, but hang on, you don’t have that kind of autonomy anymore do you.

Not looking good is it? Probably need to abandon this idea and go back to the drawing board. Good job you read this on a blog. I mean, if you’d actually started discussing this with your team, you’d be trying to put a genie back in a bottle right now…

Here’s a few pointers if you’re reading this and you’re 10 years away from exit

  1. Plan how you personally reach your desired financial state in 10 years’ time. Work out how you might be able to afford to sell parts of the firm over time and still reach financial independence.
  2. Make sure every current and future business owner does 1 above.
  3. Have a 10 year forecast that includes a business valuation. The forecast isn’t going to be accurate but you need to map out the effect of ownership changing hands over time. In other words, it’s the share matrix and the changes to ownership, enterprise value and compensation that are important, not the accuracy of the revenue, overhead, profit or cashflow figures.
  4. Make sure participants can see how the firm grows over time. It should go without saying but don’t ask someone to buy into a depreciating asset.
  5. Hire future leaders. Sure, hire for today’s job but think about whether these people might fit into the long term succession plan. Oh and tell them about it too.
  6. Make the senior team ‘owners’ early on in the process. There are a variety of ways to do this with long term incentive plans (often known as phantom share schemes) and there is a definite engagement dividend to be earned from having the senior team sign an ownership agreement.

Internal succession is a very tricky long-term strategy to pull off. It seems to work okay for many legal and accounting businesses, but there is less capital in play there and many of those firms are highly political and deeply dysfunctional. If you’re going to go for it, always keep an eye on the external market. Not just to gauge your internal valuation metrics but also to have a plan B. People change over time, owners and senior team members leave businesses before they or anyone else expect them to and you still need to look out for number 1.

Good luck 😉

This entry was posted in Leadership, Strategy. Bookmark the permalink.