The HBO show Succession centers around the dysfunction of a corporation without a clear succession plan. It’s a satire, and it’s over the top, but the truth is… succession is a major issue. You can’t spell succession without “success,” but so often, one does not follow the other.
The Common View of Succession, and Why It’s Flawed
Most people think of succession as the mere passing along of businesses, titles, assets, property etc.— i.e., the inheritance. The problem is that many business owners see it in these simplified terms, and the reality is that it’s much more complicated than that. Situations where the corporation is merely passed down to the next generation have the potential to result in failure and chaos, especially when the plans are as underdeveloped as they are in the aforementioned HBO show!
A legal change in ownership is a formal transfer of wealth but it does not address important details such as:
- Can the person effectively replace the owner?
- Has this person been groomed to replace the owner in the owner’s role?
- Does the replacement have the capability, the desire, the training, the leadership, and the other attributes necessary to carry on the leader’s role?
Often, this is not the case. Merely being the next in line to succeed the owner does not necessarily mean the person is equipped to be a true successor. In fact, many adult children may not even want it!
What if the successor is not prepared or equipped to carry out the new role? Unfortunately, this increases the chances that the business will not make it. The statistics on internal sales and transfers are quite shocking:
- Transition to the second generation—only 30% survive
- Transition to the third generation—only 12% survive
- Transition to the fourth generation—only 3% survive
A New Definition of Succession
True business succession requires careful thought, planning, time, communication, training, mentoring, and most of all, the selection of the correct successor. Let’s consider a different definition of succession, one that more clearly represents what owners of multi-generation companies practice and understand. This definition involves setting and meeting specific milestones before signing the papers.
Succession is the replacing of the owner in the business through the following steps:
- Creating a situation where the owner is not needed for the business to successfully operate without interruption, regardless of the owner’s continued involvement;
- Developing a capable, empowered, engaged management team and a sufficiently groomed and mentored owner replacement, responsible for the overall operation of the business without the owner’s direction or input;
- Providing ample time, effort, and tools to develop necessary talent, which may require additional management team members;
To be clear, the next generation might be the proper successor(s). But it shouldn’t just be a given. Even if your heir apparent has been involved in the business for many years, you and your successor will have to work together to accomplish a smooth transition which will benefit the company for many years to come.
With proper planning, time, and a clear, well-thought-out succession process, you can successfully achieve your goal of an internal sale or transition.