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Succession Planning: What Dealers Need to Know

8 Aug, 2011 By: Jeffrey W. Brown imageSource

Succession Planning: What Dealers Need to Know

Management succession can be the difference between sink or swim. Behind only financial results and strategic planning, succession planning ranked third in the most important issues facing companies in the next five years, according to a survey by Korn-Ferry.

Management succession can be restricted to the successor of the Chief Executive Officer or it can mean succession plans for all key management positions within a company. This article concentrates on management succession as it relates to the replacement of the number one person. Although this article specifically targets independent dealers that meet the Small Business Administration criteria for a small business —fewer than 500 employees — the content has application to succession plans for all key positions and for larger companies.

Unless you plan to sell your business before you leave active management, you need a management succession plan. For most dealers reading this article, management succession and equity distribution go hand-in-hand.

3 Basics Ways of Succession:

  • Involve one or more family members or friends

  • Promote from within

  • Hire a successor from the outside

All in the Family
Succession that involves a family member has the advantage of keeping it in the family and can even become a bonding experience between parent and son/daughter. Plus, you have more (not unlimited) trust in a family member since you have known them for so long.

Many small businesses have a ceremonial board of directors just to help the owners with tax benefits such as trips. Based on common sense, research and my own experience, I strongly encourage your company to have a board that consists of those with outside management expertise plus the owners and a few key managers. This helps with the issue of management succession because the selection, development and retention of the top person is the number one responsibility of the board of directors. Despite the importance of succession planning, a recent survey of 100 companies indicated that 44 percent do not have a succession program in place, and 70 percent of those that did could improve their succession initiatives. A caution, however, is that your succession plan needs to be consistent with your strategy.

For example, if you plan to sell the company in the near future you don’t need to worry about a management succession plan. To this point, one study indicated that 48 percent of family businesses will not continue to be owned or run by the next generation and 25 percent plan to retain ownership, but not be responsible for day-to-day operations. A survey by John Ward of Loyola University indicated that 44 percent of family businesses fail in the first generation, 40 percent survive to the second generation and 15 percent to the third generation. I can certainly understand the failures in the first generation because of the risks involved with starting the company. However, it is disturbing to see that 55 percent fail in the next two generations of what should be an established business. Obviously, management succession was not adequately addressed.

Promoting from Within
“The Hero’s Farewell,” by Jeffrey Sonnenfield says, “The CEO is both symbolic and actual. He or she must be an inspiring leader and a good administrator.”  The problem is there are few people with either capability — let alone both. Plus, you need someone who really wants to be the No. 1 person and has the professionalism and loyalty.

Promotion from within can be a great morale boaster if you promote someone whom others recognize as being worthy. This helps ensure someone will know the organization and gives you time to observe their values such as work ethic, honesty and fairness. Once you have made the selection, it is important to let the person know. For starters, they may be looking for another job, having no idea they were being considered for this promotion. Second, you need to make sure they want this opportunity.

Next, you should assess what they need to accomplish between now and when you step down and they take over. Training needs to be arranged to help fill in the gaps, but unfortunately it is difficult to train someone lacking skills in leadership, interpersonal relationships and/or communication. Job shadowing is a helpful training technique. One downside of promoting from within is the “Peter Principle,” meaning the candidate’s last position was their level of maximum capability. Remember, the unique aspects of being president includes the need to be a general manager, having a “Buck stops here” attitude and possessing those traits identified by Sonnenfield. In a typical small business, no other position within the organization enables a person to fully demonstrate these abilities.

Going Outside
If you do not have an internal candidate, and you identify this soon enough, you can hire someone from the outside and put him/her on a fast track through key positions. The only variable in this scenario is at what level the person enters the company? While I prefer a situation where they are brought in at management level and fast-tracked to the top, you don’t always have that luxury. Perhaps, unexpectedly, your health moves the time table forward, or your hand picked successor is suddenly out of the picture for any number of reasons.

Hiring an immediate successor is not much different from the type of search projects my firm does for higher level positions in large publicly traded companies. First, you should conduct an honest needs assessment. Remember, your company is at a different stage now then when you started it or purchased it – so don’t look for someone like you. How much control you plan to give this person and how you plan to compensate them will have a large bearing on who you can recruit. For such a key determinate of your company’s future, I strongly recommend you retain a quality search firm.

The point about compensation leads to the final consideration of succession, which is, how do you get money out of the business? Given the complexity of this, I will only offer generalities except to say that your CPA and attorney need to be involved. Obvious but often expensive solutions include offering an ESOP (Employee Stock Ownership Program), going public, retaining ownership so profits accrue to the same owners, and implementing a variant of this last option whereby the successor becomes an owner along with you. Offering such an equity opportunity, even with a smaller company with a lower salary/bonus, certainly helps in the recruitment effort since there are some good candidates out there who are eager for a meaningful ownership position.

In Conclusion
You have risked too much, worked too hard and owe too much to your employees to allow your company to crumble due to the lack of a well-thought-out management succession plan. Developing and implementing a succession plan can help ensure your company continues for generations to come.

Process & Practices
Companies devise elaborate models to characterize their succession and development practices. Most reflect a cyclical series of activities that include these fundamentals:

  • Identify key roles for succession or replacement planning

  • Define the competencies and motivational profile required to undertake those roles

  • Assess people against these criteria - with a future orientation

  • Identify pools of talent that could potentially fill and perform highly in key roles

  • Develop employees to be ready for advancement into key roles - primarily  through the right set of experiences.
In many companies, over the past several years, the emphasis has shifted from planning job assignments to development, with much greater focus on managing key experiences that are critical to growing global business leaders. North American companies tend to be more active in this regard, followed by European and Latin American countries.

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