MATT BISURIS: ATTORNEY, SCHWABE, WILLIAMSON & WYATT
Planning for an executive leadership transition requires a multi-faceted approach.
There is no more critical juncture in the life of a business than when the time comes to hand over the reins to someone else. For some companies, that change occurs gradually as a successor is developed and integrated over an extended period. For others, the change can occur suddenly due to an unplanned event such as a death, disability, divorce, or other occurrence. Businesses that are equipped with both a longer-term succession plan and a short-term contingency plan are most likely to succeed through a transition.
According to the 2018 State of Manufacturing in the Pacific Northwest survey conducted by Schwabe, Williamson & Wyatt and Aldrich CPAs + Advisors, only 41 percent of respondents have a plan in place for transition of executive leadership. However, 60 percent of respondents stated that they plan to transition out of their business within the next five years. The takeaway is that many business owners do not have a plan in place to achieve their transition goals.
For many businesses, a change in leadership and ownership occurs at the same time — it is common for an existing owner to retain control until they have sold all or most of their ownership. Transitions are more successful when new ownership is well-positioned to assume leadership and continue to grow the business. Owners are more likely to get paid in full — and are less likely to regret selling — if their business has been transferred with a plan to help the next generation succeed.
However, a change in leadership does not always correspond with an ownership change. Planning for a change in leadership is best started at least four years before the expected transition. This allows time to identify criteria and steps toward developing new candidates, whether they be from within or outside of the company.
Without good criteria and development, new executives are more likely to depart, leading to higher training costs and operational interruptions. External CEOs tend to have a higher departure rate than those promoted from within. New leaders need a solid framework for developing key relationships with the management team and stakeholders. Outgoing leadership should be prepared to collaborate with incoming leadership to ensure that critical knowledge is transferred and that there is clear communication on roles and responsibilities across the company. A regular key skills evaluation can help ensure that new leaders are meeting core competencies.
In smaller companies, an internal successor who has been groomed and trained has a greater likelihood of success. Often, an exiting founder will continue to serve as chairperson or have some continuing role in governance of the business. It is critical to define that role and ensure that the new owner/CEO has the control and respect that is needed to lead and grow the company. A new leader should be given time to focus on developing the management team as their priority.
What are attributes to look for in a new leader? In a family company, a family member who has some leadership experience outside the company can be valuable. Individuals who understand where they have gaps in skills or experience, and then seek to develop those skills and experience through mentoring, tend to be successful. In many companies, hiring a competent, experienced leader will produce better results than hiring a family member to serve a role that he or she is not qualified for. Leaders in small and family companies must be able to effectively structure communication in business and with the family and navigate the differing roles between owner and business leader.
In a family company, a leadership shift can often be managed by implementing a successor leadership review team that involves key members of the family and stakeholders. Involving all owners and appropriate family members in developing executive job responsibilities and in the selection process can generate a great sense of buy-in and alignment.
A long-term leadership succession plan is critical, but it’s not sufficient. Businesses must be prepared to deal with
unexpected and often unfortunate circumstances that can create the need for a sudden leadership change. Someone (or often a group of key employees or family members) must be educated and empowered to run the business if current management becomes unavailable. Ensuring continuity and reducing disruption is of utmost importance in these circumstances. Every business should have a written contingency plan that serves as a road map to document how core business functions will be performed and key documents and processes organized if those with institutional knowledge become unavailable. The most effective contingency plans are integrated with the longer-term succession plan so that goals and objectives of current leadership and planned successors can be aligned and executed on quickly in the face of adversity.
Matt Bisturis is an attorney with Schwabe, Williamson & Wyatt. He helps companies and their owners navigate the legal challenges that come with establishing, growing, operating and eventually transitioning their businesses.
He can be reached at (360) 905-1113 or firstname.lastname@example.org.