Why Succession Planning is Rarely a Success
The numbers are staggering.
10,000 Baby Boomers hit retirement age every day and 60% of all business owners are over age 55. According to recent surveys by the Exit Planning Institute, PNC Bank and Kent State, 80% of business owners have no transition plan, or have not documented or communicated a succession plan.
Furthermore, 80% of these businesses are simply not saleable, nor do they have a proper talent pipeline to continue on. Of the remaining 20% that are sold, 12% will be sold, but not at the original asking price.
The study also discovered that 40% of business owners did not have a plan that covers their forced exit (death, disability, divorce or illness).
Perhaps Benjamin Franklin said it best: “By failing to prepare, you are preparing to fail.”
Even when succession planning is undertaken by business owners, and 98% of them feel it is important, they rarely have a plan in place. When they actually do have a plan, there are several reasons why they rarely succeed…
- Many think it is not important and choose to focus on the transition, rather than the transactional nature of a business.
- If it is family business, sometimes the family grows faster than the business, and there are other family dynamics and emotional components at work that delay or prevent an effective transition.
- Potential future leaders leave the company looking for greener pastures.
- Owners simply do not adhere to the plan, and many continue to stay long past their expected date of departure.
- New leaders are ill-prepared to take over, or simply do not perform to the level of the original owner.
- A focus on the past or a mindset fixed on, “this is the way it has always been done,” not only cripples future leadership, but puts the entire future of the business in jeopardy.
- Politics, time, lack of commitment and fear.
Not all hope is lost. We have been a part of many succession plans that have been and continue to be successful, and they all share these characteristics…
- The understanding that effective succession planning is more than just transitioning to new leadership, there are transactional components at work as well. They take an objective investor’s approach to looking at their business… Is the risk at a low level and is there a potentially high ROI?
- Operational Efficiencies: Are there efficient processes and procedures in place that can be easily managed and communicated?
- Financial Strength: Looking at the metrics (ratios, receivables, banking situation), is the company operating at a high level and doing more with less?
- Transition Ready: If the owner should suddenly leave or pass away, how easy would it be to transition to new leadership or potentially sell the business for a high return? Legal and financial preparation?
We know from our own experiences, especially in a family business that is often emotionally charged, that succession planning is an extremely necessary, but difficult exercise. In fact, according to the Exit Planning Institute, after transitioning or selling their businesses, owners “profoundly regretted” it after just (12) months.
A glut of companies will be transitioning or be for sale for many years to come as the Baby Boomer generation continues to move into retirement. Focus on making your company more transition-ready, and get your advisors (Financial Planners, Attorney, CPA and other key advisors) on the same page to make sure you are financially and legally ready.
It is also important to focus on your emotional readiness with a life or executive coach. Also align yourself with a well-trained executive search and business advisory group that can help you find your next leader and management team, as well as help you build your organizational bench strength.
Instead of planning to fail, plan a clean transfer to the next generation that has been fully prepared and wants it, or a mutually beneficial transaction or transition to a new owner.
After all, succession planning is about preparing for the transition or transaction of your life. Are you ready?
SOURCES: PWC Family Business Survey; PNC Bank; Kent State; Exit Planning Institute; and Pew Research Center.
The single largest transaction and transition of your life deserve special attention.
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