Here's a question that may keep you up tonight: What's going to happen to your spa or pool operation when you retire or are not able to run the business? Not what do you want to have happen, but what's most likely to happen to your retail outfit once you've decided to step aside?
If you think that you're simply going to hand the reins to your kids, think again. According to the non-profit Family Firm Institute, seven out of every 10 family-owned businesses in the United States do not make it through the second generation. Even fewer get to the third generation. And while not all of those failures can be attributed to poor succession planning, it behooves you to consider this: As an entrepreneur, you took every measure to ensure that your business would succeed, from the sales and marketing strategies to the inventory control to the accounting schedules. Why would you let your life's work end up behind boarded-up windows sporting a "For Lease" sign because you didn't create a plan to help the next generation of ownership to succeed. The trouble with succession strategies is that most business owners feel that their successors — whether it is their kids, an employee or another party — are learning how to run the business by working in the business. While employment teaches operations, it doesn't necessarily teach leadership and accountability. Until a protege establishes his or her own sense of ownership, the relationship between owner and employee will remain just that. And like any parent/child or boss/employee relationship, communication breakdowns become the biggest roadblocks to reaching a goal.
As a business succession planner, I'm often brought in after communication has bogged down between owner and successor. And, as is the case in most family-owned businesses, I find that the issues have begun long before the owner packs the Winnebago for the national RV-park tour.
FACING CONFLICT
Who's to blame for these communication problems. It depends on the case, but both sides can provide significant resistance in executing an effective succession plan. Conflicts that go unresolved at home and/or at work can fester if not addressed and dealt with early. For instance, the boss (owner/parent) asks the successor (employee/son or daughter) to rearrange the show .oor to feature a different spa for customers. The successor rearranges the floor but chooses a different model than the owner intended. But the owner chooses not to correct the problem. In the mind of the successor, he completed the job. The owner, on the other hand, thinks the kid has not completed the job, yet doesn't hold him accountable for failing to follow specific orders. If this sounds familiar, you can bet that this relationship will have difficulty resolving larger issues.
Unfortunately, solving problems goes against human nature because we're taught to avoid conflict. But that's how succession planning is best-addressed — facing conflict head-on and resolving it.
LONGER THAN YOU THINK
If these seem like managerial issues, they are. But they stem from the biggest mistake an owner of any size company can make — underestimating the amount of time needed to develop a successor. I recently took a survey of small-business owners in the Denver area, and asked them how long a succession strategy should take. An overwhelming majority felt that one year was enough time to initiate and complete the transition. It was the shortest available answer but also the farthest off the mark.
Any business, no matter how large or small, should earmark at least five years to properly determine a successor and train that person before eventually handing over the reins. Need strong evidence. Jack Welch, the legendary boss of GE from 1981 to 2001, admitted 10 years before his retirement that he had contemplated daily about who would succeed him as chief executive officer. While the chances of your business achieving the same market capitalization as GE are slim, the lesson is obvious. Good businesspeople give succession plenty of forethought. It allows you the luxury of time to resolve questions like:
- How can I develop trust in someone to take over the business. Good operational skills are fine but leadership has to be cultivated by the owner.
- Does my successor have enough money to buy me out. If not, the next generation has to be successful at running the business because the buyout will have to come out of ongoing operations. Because business is cyclical, what happens if the business can't afford to pay the owner every month? Who feels the hit? It's the successor. If the successor isn't willing to cover the hit, then the business has to absorb it, and the debt rises. Banks aren't willing to lend, and the senior has been taking money out at the expense of debt accumulation.
- Have I diversified enough to avoid having to rely totally on the business for my retirement. By moving assets over time into other investments outside of the business, owners can avoid worrying that they might have to return to the business or about the cash restraint that payments may cause the business when times are lean.
CONCEDE TO SUCCEED
Successors, too, have expectations of the owners. Parents need to know when it's time to move aside, because after a certain period of time, their involvement can be detrimental.
They're typically tired of running the business, tired of change and tired of taking risks necessary to sustain the business. They also need to allow their successor the opportunity to make decisions that might not work. They should be transitioning to a mentoring role. Even though the successor isn't blazing his or her own trail, they are investing blood, sweat and tears, as well as lost opportunity elsewhere, to lead your business. They do not want to be burdened with a parent/owner that doesn't want to leave, even when they should. However, the only way to know what these expectations are is to get both parties together and open up the lines of communication.
I listed a lot of symptoms in this column. In future issues, I will offer solutions to these problems, as well as any concerns that may have arisen from your real-life succession strategies. The more real-life the problem, the more effective my answers will be.
