Succession Planning

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This article, discussing succession planning in
owner managed businesses, first appeared in
Better Business magazine. It is reproduced by
kind permission.
Mungo Dunnett Associates 11 Polstead Road, Oxford
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info_at_md-as.com Web www.md-as.com We operate
across a range of businesses, large and small.
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May 2004
Succession Planning
BY MUNGO DUNNETT
You will have come across the concept of the
business life cycle. Businesses start off on a
wing and a prayer (and a loan) and go through
some pretty tough times in the first few years.
Theyre finding their way, adapting to the things
they hadnt expected to find when they started
out and fighting to survive. In fact, most of
them dont survive. 86 of UK businesses dont
last ten years. But those that make it gradually
sail into calmer waters. Wiser, scarred by a
couple of close scrapes, but looking stable and
feeling safe. Using tried and trusted methods of
dealing with suppliers, dealing with customers,
handling finance and winning new business. With
an experienced person in control, and some
trusted senior partners, many of whom have been
there from the beginning.   But then the
unexpected happens. It becomes time to pass on
the business to a new generation. Unexpected,
simply because it was never thought of the
pressure of running the business never seemed to
allow time to dwell on the future. An
extraordinary facet of small businesses is that
they so rarely think about their future. The
result is that they find themselves addressing
issues of their An extraordinary facet of small
businesses is that they so rarely think about
their future management structure, their
financial performance, their future strategy
even their future continuation all because
there was not adequate preparation for the
inevitable retirement of the top team. The
result is that these businesses run the biggest
risk they have for years ever since the early
days when they were
fighting for survival. This is a particular
issue for family firms, not because families are
particularly bad at communicating and planning
(thats an entirely separate issue!), but because
so many small businesses are family-run 85 of
all UK businesses. It brings with it two major
issues, neither of which are typically thought
through properly who can take over? and Should
we just sell up?   Much of the difficulty here is
simply due to the fact that such firms dont have
any urgency about the matter. See Why nothing
happens Its easy to focus the mind when there
is a burning bridge some form of customer base
meltdown, a product disaster, cashflow crisis or
big-scale personnel problem. Succession
planning, by contrast, can always be postponed.
It gets pushed down the list of priorities
because it can always be deferred another few
weeks or months but also because its a tricky
issue to raise. Too tough to mention   Establishe
d businesses are like any type of long-standing
relationship. They run in grooves. The people
at the top will have established their own way of
doing things. They will know who is good at
what, which direction is generally taken, and how
matters are discussed. They will also, as in any
relationship, have patterns, protocols and areas
that are not necessarily open to discussion. On
this type of fundamental level, it can be
remarkably difficult to open the discussion about
succession. It rocks the boat it implies that
the leader is running out of gas (and maybe
losing their touch) it raises a host of awkward
issues about who could step up to replace them
and also
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issues about the pay-off if the business were
actually to be sold. All of these are very real
reasons why succession issues are simply not
discussed until time is short, or circumstances
have started to go wrong. The Muhammad Ali
problem   Another reason why the issue is not
raised is that the boss simply cant contemplate
it. Lets say that the business has been running
for decades. Its success has become inextricably
linked with the founder in fact, it has become
a determining part of his life. Its no surprise
that a large number of Successful
first-generation businesses often find that their
senior management structure is ageing as a unit,
and advancing in lockstep from their twenties to
their late fifties entrepreneurs and senior
managers dont live twelve months beyond their
retirement there simply isnt anything else in
their life that compares with the buzz and reward
of running a business. All of these are reasons
why the boss will resist retirement. Its not
only the replacement of their own skills with
that of a younger person its the removal of
all that is most meaningful to them. No wonder,
therefore, that they always think theres another
fight left in them. Its the most human of human
behaviours the unwillingness to let go when
youre at the top. The hole in the middle   A
separate issue is the frequent lack of pretenders
to the throne. This isnt just a perceived lack
which is sometimes a separate issue its a
quite genuine lack of talent. Successful
first-generation businesses often find that their
senior management structure is ageing as a unit,
and advancing in lockstep from their twenties to
their late fifties. This will have created a
circumstance where they have not been looking for
strong middle managers, knowing that they
themselves have no intention of leaving, and that
there would be no space at the top table for a
highly-qualified (and expensive) rising middle
manager. But they will probably have lost
whatever suitably qualified stars they had the
thirtysomething who could have been the future of
the business was given no encouragement, saw that
it was truly a case of dead mans shoes, and
walked.   The result is that many successful
small businesses have a giant hole in the middle
of their management structure. The top team is
long-established (and in many cases has led to
their being set in their ways) but cannot draw on
a pool of new-generation middle managers because
the quality is simply not there. There
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are plenty of competent junior staff but these
are miles off advancement to the top team. Stick
or fold   In casino parlance, the first decision
is whether to stay in the game and improve your
chances, or to throw your cards in and seek a
buyer. See The key decisions This one of
the most basic of all business decisions can
lead to some remarkably The prospect of a payout
can also instigate, suddenly, selfishness
that was previously hidden but which can now be
revealed because the company and its
relationships is being wrapped
up dysfunctional behaviour. The attractiveness
of a pay-out will vary considerably from person
to person they may have short-term financial
pressures (or not), be a few years younger than
the others, or simply not ready yet for the golf
course. The prospect of a payout can also
instigate, suddenly, selfishness that was
previously hidden but which can now be revealed
because the company and its relationships is
being wrapped up. Beware the business partner
who suddenly doesnt need to be nice to you any
more.   Another strange trait of succession
issues is the frequency (and speed) with which
businesses will run out of enthusiasm for the
future. Whereas they would not in the past have
questioned the wisdom of going on from one year
to the next, suddenly the option of leaving the
game saps all their energy. What follows is a
type of submission that affects their ability to
steer the business, in prime condition, towards a
buyer. The business can suddenly look old and
tired just at the time when it needs to
look its best. Unless a business is planning
positively for its future, seeking ways to make
itself better, reinvent its purpose for its
customers, and enthusing its staff, it will
gradually fade away. Some businesses can spend
literally years in limbo whilst a succession
issue is being inadequately handled. Communicatio
n and a change of tone   The answers, as they
so often are, are people issues. A firm that
finds it easy to raise issues, discuss them, and
seek sensible and well-received compromises, will
manage to steer a reasoned course towards the
best option. Indeed, such a firm will already
have recognised the need for succession planning,
have created a financial package attractive to a
new senior manager (and to the incumbents), and
mapped out a transition period during which the
existing management gradually winds down their
involvement and transfers knowledge to the new
person, while holding together the confidence of
the staff, the bank and the customers.   But
if communication is more tricky, it often takes
an outsider to change the ground rules, bring
some objectivity to Some businesses can spend
literally years in limbo whilst a succession
issue is being inadequately handled the
discussion, and facilitate the choice of option.
This will involve the decision to create a
succession, or to seek a buyer. In the latter
option, it will involve the need to improve the
saleable value of the business, by
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taking a fresh look at how the business runs,
where the inefficiencies are, and what are the
most cost-effective ways to improve the bottom
line quickly. Ultimately it will involve finding
the best price for the business, and deciding the
role of current management in the handover
process. All of these are specialist skills that
the business will not have.   There is a brutal
reality about the business
life cycle it means that you, and your
connection with your business, will one day die.
Your choice is either to recognise this, and make
sure that the business can survive without you
or realise that the business you have built will
wither without you. There is absolutely no
reason why that should occur. But it depends on
your willingness to bring the business full
circle by planning for its next generation.