How To Develop Capable Leadership Management Successors

Ben presented us with a situation common to many business owners who find out too late they are not in a position to exit on their terms. Ben had founded and built a very successful business supply business. He had customers across the country and was consistently earning solid profits under his management. He had decided he was ready to retire in the near term.

However, as we visited, it was clear he had ignored the fundamental reality that a business itself is worth more to the extent that it depends less on you for its success. He clearly had no capable leaders to succeed him and he lacked management depth in key positions of importance to potential buyers. He was finding himself late in the game to try to address this.

The Next Step Program identifies the top 12 principal reasons which have caused business owner transitions and exits to be unsuccessful. Each of these reasons impacts the company's ongoing annual profitability as well as an owner's transition and future exit results. This article addresses the 8th of these 12 reasons:

  • Reason #8. Lack of Capable Leadership Management Successors. A process for replacing you and other key management or leadership (either internally or externally) has not been identified or developed, and you have failed to properly develop, incent, and retain key personnel.

In order to prepare your management, it's critical that you take the following two actions:

  • Build Your Leadership Team Depth Chart
  • Create A Transition Flexible Key Employee Retention Incentive

In his groundbreaking study and the follow-ups, best selling book Good To Great: Why Some Companies Make the Leap and Others Don't, Jim Collins stressed the importance of getting the right people "on the bus," getting the wrong people "off the bus," and the right people in the right seats on the bus. This is a key to not just profitably operating and growing a successful business, but also key as you address your transition/exit plans and contingencies.

The expected retirement of a key owner or other key employee, or the unexpected loss of a key owner or other key employee due to death or disability, can pose a significant financial hit to any company. Pre-planning to be prepared for this can reduce the adverse impact.

So what should you do now? The immediate answer is not unlike that encountered every day by professional and college sports teams. They have a depth chart. In an ideal situation, there is always a back-up player for whichever specialty position needs refilling due to the loss of a player, whether by death, injury or retirement. In the context of a business operation, the first line of defense is to have a company depth chart. Those next on the list are ideally always close to ready to step in as needed.

Most companies should also be utilizing an active board of directors which consists of certain key insiders and at least one outsider who can provide insight to your industry and business. This board also helps provide management continuity and immediate oversight in the event of your unexpected death or disability.

Depending on the nature of your business, you should consider establishing an advisory board. The members do not have management responsibility, which enables you to focus specifically on enlisting the assistance of capable persons in your industry who do not want the responsibility or potential liability of being on the board of directors.

Absent your own depth chart for the company, you should be prepared to quickly access the depth chart which exists throughout your industry. If you have strong talent in your company today, you would be naive to believe that they have not been in contact with, or been contacted by, executive or management recruitment firms to fill the gaps in management talent encountered by other companies throughout your industry.

You as a business owner should be aggressive and strategic in planning for the possible loss of any given key employee. If your inside depth chart is insufficient, you should have developed your own ongoing relationship with a management recruiting firm, particularly one which is familiar with your industry. To the extent that you incur an adverse financial impact from the loss of any key employee, this can be lessened by the speed with which you are able to replace that individual. An ongoing relationship with a management recruiting firm which is already familiar with your business will help this to occur.

Not every key employee is suited to become the next leader of your company. We work with a number of advisors who help us to evaluate key employee potential and to help further develop leadership skills and, to address other potential leadership issues. This can be evaluated in the context of a transition growth plan.

The transition growth and exit planning process will help you and your advisors focus on building and retaining a successful key employee management group. Having the right team in place builds company value and enhances a sale to a third party. An inside key employee or key employee group could also become a purchaser of your business in a sale to insiders.

Strong key employees will either make your company more profitable and valuable (or they will make your competitor's company more profitable and valuable if that is the better opportunity for them).

It is generally in your best interest to provide your key employees with an incentive package that motivates them to continue to excel and to remain with you. Your immediate task is to identify these key employees, determine the right incentive package, and implement it. A key employee ownership incentive agreement is intended to maintain your exit flexibility.

Such an agreement will address the employee's desired and expected development, as well as provide the type of cash and equity (real or synthetic) which will best achieve these objectives.

While it's important to address key employee retention incentives years ahead of your exit, it is also often necessary to address this at the time of your actual exit. One typical example is the "stay bonus," which can be used not only in the event of your unexpected exit, but can also be used to help retain key personnel for at least a given period after your planned sale. This can help provide comfort to a buyer of a successful ownership transition by helping to keep your team on the new owner's "bus."

The Next Step Transition Growth and Exit Planning program has been specifically designed to address and overcome each of the 12 principal reasons for failure. This program consists of 12 critical building blocks. We are using this program to help business owners design and implement their Transition Growth Plans for accomplishing their transitions and exits successfully.

Nicholas K. Niemann, Esq., is a transition and exit planning advisor and a partner in the law firm of McGrath North. The firm's website is www.McGrathNorth.com.

Andrew D. Horowitz, CPhD, is a wealth advisor and president of The Estate Management Group. The firm's website is www.EMGPlanning.com.

Published: December 3rd, 2009

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