How to find and groom your business successor

Wednesday, March 09, 2011 | Posted by: Fiona Cullinan
Categories: Business advice, Thought Leadership | Tags: report, incentives, corporate finance, skills, succession planning, wealth management, ownership, transfer, White Paper, family, exit strategy, selling a business, training, transition, advisory, successors, screening, compensation, roles

Who to choose? That is the question facing an increasing number of individuals seeking to transfer ownership of a privately held business. Here are some things to think about to help you identify who best to pass the baton on to, ways to incentivise them and how to smooth the transition.

This is the final post in our five-part series on business succession planning – see previous posts for a step-by-step guide, problems of deferral, best practice template and more.

While privately held business owners and managers are usually adept at dealing with change, the same can’t always be said for identifying and grooming their successors. Why? We offered some potential reasons in our post on the consequences of postponing succession planning.

So what can you do to minimise the pain and pass on the baton successfully?

Keep your emotions in check
There are psychological challenges involved in choosing a successor. For example, many owners start their business so they can take control of their lives. When it’s time to let go, and lose control, they are understandably reluctant to hand the reins to someone with less experience.

Family dynamics also create emotional challenges, especially when deciding between family members or when children active in a family business are determined to do things differently in future, potentially putting the business at risk.

You can keep everybody’s emotions in check by:

• identifying the skill set needed to run the business;
• providing your successor with sufficient training to support continued business growth;
• designing a compensation package to reward performance;
• communicating the roles and responsibilities of your successor to stakeholders.

Identify your successor
Your choice for a successor may seem clear, but there’s a danger in assuming that an individual is interested in ownership or leadership. And even if the person is keen, he or she may not be right for the job.

The first step is to identify the skills that your successor needs to run the business. This can be made easier by outlining the long-term goals of your business. For example, it requires a different skill set to hold the course for a business than it does to transform or reinvent it.

The next step is to establish an open dialogue with the candidate to determine what he or she really wants. Sometimes this screening process is best handled by a facilitator – particularly with children who may just say “yes” because they think that is what you want you want to hear.

Groom your successor
Once your successor has been identified, you need to develop a skills-related succession plan that aligns with your timeline for retiring.

A thriving business acts as an excellent training ground for developing leadership skills, understanding the nuts and bolts of the organisation and acquiring the myriad skills to assure a seamless transition. As your successor’s skills and capabilities grow, involve him or her in business decisions, the board of directors and industry associations. These activities will also help build confidence in your candidate throughout the organisation and with stakeholders.

But at some key point, you will have to judge your successor’s leadership ability. If it becomes apparent that the person isn’t right, don’t hesitate to recruit someone else. Identifying more than one potential successor isn’t unusual and has its benefits.

Design a compensation package
Most entrepreneurs succeed through drive and determination. You want your successor to embrace similar values, so it’s better to link your successor’s compensation to performance and moving the business forward, not just moving into the corner office.

For your management team, it may be necessary to offer equity ownership or a profit-sharing scheme to provide an incentive to facilitate the succession rather than undermine it.

The majority of business owners have their personal wealth tied up in the business. So make sure you extract value from the business before you leave. The last thing you want is to be dependent on your children for an income in retirement.

Help manage the change
Selecting and motivating a new successor can be one of the most challenging tasks of a business executive. But it’s important to clearly communicate your succession plans throughout. The last thing you want is to surprise people. Discuss your plans openly and early, and you and your employees can work toward a common goal of building your business under new leadership in an organisation structured effectively for the next stages of its life.

To find out how our professional advisers can help you build an effective succession plan, including estate and tax planning, transaction advisory and wealth management, contact your local Grant Thornton specialist. Alternatively, if you have any questions on succession planning or are considering selling a business, contact our Corporate Finance team for tailored, individual advice.

We’ve taken the information above from our white paper: Succeeding at Succession: identifying and incentivising successors – you can download the full information as a PDF. 

You might also find these links useful:

* Read more posts on succession planning.
* Download the white paper series: Succeeding at Succession.
* Read our stories behind the deal, including a business disposal and an international acquisition.