Dr. Rick Franza, Professor of Management at the Hull College of Business, discusses a different, timely business topic each Monday in this column. This week, he talks about the importance of a succession plan for your business. The interview has been edited for clarity and impact.
ABD: We often hear that a business should have a succession plan to keep going after the owner or founder retires. Why is a succession plan important?
Rick: It’s particularly important for small businesses and family-run businesses, but succession planning is important even for the largest companies.
Part of this depends on your “exit strategy.” If ultimately, you’re just going to sell your business for the cash, it may not matter much. It depends on how much you care about selling it – if your name is still attached to it, you’ll care a lot more about it. Once you sell it, you’ve ceded any say you have in it, unless you continue to hold a share in it, or you continue owning it and just turn it over to new management.
If it’s a family business that you started and want to carry on as a family business, you have to determine if there is a family member even interested in taking over the business.
ABD: Most people starting a new business are thinking about the beginning, so they often don’t consider the end. When should someone start considering an exit strategy?
Rick: It’s typically true that there are so many things to getting a business started, that the last thing they think about is an exit strategy. But once you get the business going, once it’s successful or at least viable, it’s critical to start thinking about a succession plan.
Once your business is viable and starts to grow, you’ll have less ability to control the whole business. That’s the time to start thinking about who is going to lead the parts of the business that you used to lead. The longer-term aspect of that is to identify who will take over your seat.
You’re looking to identify the people, whether it’s a family business or not, who are talented and whom you can trust and put them in those positions in your company.
ABD: You’ve mentioned family businesses a couple of times, and often successful startups wind up having several generations owning and running the business. What kind of succession plan is needed for passing the keys on to a younger generation?
Rick: Some of it is similar to any succession plan, but if it’s a family business, and it’s your plan and their plan to take over, then you want to get the children working up through the business. But there’s always the question of which of the children will take over. Are any or all of the children even interested in the business? Sometimes succession planning is focused on the children and then, none of them are interested.
Often, the heir wants to move right into the corner office, but it’s important they start on the ground floor doing all of the operations. It gives them familiarity of what the business is about. The reason your business grew is because you started knowing all of the operations. Look at the Cathys from Chick-fil-A. They all worked their way up in the company even though they were the heirs’ apparent.
But it’s also not a bad idea to get them to work someplace else for a time to be exposed to other ideas. If everything stays internal it can be problematic.
ABD: Succession planning usually focuses on what happens to the business, but is it also important to focus on what you’ll be doing after leaving the business? I’ve heard it said that one of the biggest risk factors of death, especially for men, is retirement.
Rick: You’ve got two constituencies to manage in a succession plan – managing for the health of your business and planning for your personal future.
I recently corresponded with a guy who sold his company a few years ago with the plan to retire. He got bored. He found he could only play so much golf. So, he went back to work for a corporation, even though he didn’t need the money. Now, he’s thinking of obtaining a Master’s degree to teach in a college. While he didn’t need the money, he was personally unfulfilled in retirement. So, yes, you have to have your personal plan in place.
ABD: What happens when the succession plan doesn’t quite work out and the business you worked so hard to build starts to flounder?
Rick: You’ve got to decide if you want to let it go or if you want to be like Bob Iger at Disney and jump back in. If you still own the company, you can step back in. It depends on how much you value the company. Sometimes, it’s hard to admit that you made a mistake in succession planning.
That’s why you try to do this early, so you can identify the potential successor. Talent is important, but just as important are trust and a commitment to the business.
