By Mark Bronfman, MBA, CPA
In his excellent book, Stumbling on Happiness, Daniel Gilbert explains that most people fundamentally lack an imagination to understand the actions today that will bring true happiness tomorrow. Business owners also suffer from this myopia – living in a world of myths about how they can successfully grow and exit their business in style. It’s time to debunk these myths.
Succession is like happiness – it is easy to talk about and much harder to attain – precisely because it takes imagination to act differently. In succession planning, if you want to eventually EXIT your business, PULL and attract people and capital to it today.
Doing succession right can be so empowering. This is possible because an effective leadership and capital succession strategy increases your company’s value; enhances your employees’ commitment to the company; expands your exit strategy options (keep, sell, go passive, etc); strengthens your balance sheet; and provides personal “psychic” benefits. In short, having the right succession plan is one of the shortest paths to achieving the deep fundamental desires of business ownership.
After counseling over 100 business owners on succession pathways ranging from lifestyle businesses to going public, I am convinced that many business owners do NOT know how to powerfully achieve leadership succession and capital succession. I offer below executive compensation, capital structure and exit planning strategies as a portal into the ten myths and realities of succession planning.
Myths 1-5 – Leadership Succession
|1. Leadership Succession is all about the money
|Great talent is attracted to great corporate culture, career opportunity, customer engagement, owners’ vision and financial security – not just a pot of money at the “end of the rainbow. “ Surprisingly, owners who can make their company perpetual may have the clearest pathway for their personal succession plan.
|2. Succession must mean a dramatic change for the company
|We have identified 6 Succession Pathways – three of which are continuation paths with a modest shift in ownership structure and company direction and three of which are transition path where succession enables a fundamental and often dramatic shift. All owners benefit from exploring and crafting their own custom succession pathways.
|3. An owner needs to keep paying more in salary and bonus to attract and retain superior next generation leadership
|Over the past ten years, the tide has dramatically changed from straight high salaries to a performance based pay. In fact, the Grant Thornton 16th Annual Government Contractor Survey highlights that salaries and bonuses DROPPED in 2010 compared to 2009 for the number 2, 3 and 4 executives in GC’s with sales over $50M. Conversely, company proxy statements show a dramatic increase in long-term incentive plans such as stock appreciation rights and performance-based long-term profit sharing.
|4. Stable and strong middle-market companies don’t need to bother with succession planning.
|As companies grow, they face fierce scarcities of cash (needed to fuel growth and balance risk), talent (needed to provide true leadership and skills for growth) and confidence (that ALL key leaders can enter AND exit the business in style.) Leaders address these three scarcities head-on before they jeopardize the company’s future. Result: owners can then address succession from a position of power – not weakness.
|5. Long-term incentive plans to attract and retain great people should be based primarily on company sales and profits.
|Paradoxically, rewarding only profits can result in value destruction. It is far superior to reward a balanced HEALTHY company. We use the acronym QQERO to refer to a balance of lagging and leading key metrics to drive incentive compensation. This includes Quantity of earnings; Quality of earnings (products, services, customers); Efficiency of earnings (return on invested capital, days sales outstanding), Repeatability of earnings (backlog, customer satisfaction) and Other strategies objectives (commitment to corporate culture, innovation, scalability.)
Succession planning does not have to and should not be a tool used when you are desperate to get out of your business. Rather it’s a strategic process to give you the freedom and fulfillment you deserve now and when you eventually choose to exit your business. Choosing the right succession pathway for you and your firm is critical for you to move from just make a good living to creating real equity and in time a legacy you can be proud of.
Want to foster healthy growth, increase the value of your company, decrease its dependence on you or a few other key employees, redirect your resources to eliminate scarcities, and give you more options than you had before planning? Focus on the realities, not the myths, of succession planning.
In a forthcoming post, I’ll focus on the five myths related to business owner exit strategies.
Mark C. Bronfman (Mark.Bronfman@LFG.com) is a Registered Representative of Lincoln Financial Advisors Corp. Securities offered through Lincoln Financial Advisors Corp., a broker/dealer. Member SIPC. Investment advisory services offered through Sagemark Consulting, a division of Lincoln Financial Advisors Corp., a registered investment advisor. CRN 201103-2052400
Exit Planning offered through unaffiliated third parties.
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