The Promised Land
Do you sometimes wonder why you are in business? Have you lost sight of the end reward? Do you sometimes feel like Moses, wandering the wilderness for forty years?
It doesn’t have to be that way. There are goals to work toward and anticipate, with an end result that will be both rewarding and profitable. A succession plan will lead you to your ultimate goal of cashing out profitably, at any time. But without understanding succession planning strategies, you might just keep wandering the wilderness.
Just keep in mind—no matter which succession plan you aim for—you will need to ensure that your business represents both a solid investment and the potential for future return for investors/owners. Because your successor—no matter which of the three types he or she might be— is also, in a sense, looking for the promised land.
Ways out of the Wilderness
So let’s explore the three types of succession planning and stop this pointless wandering.
1) Investor succession
Basically, any internal or external transfer is considered an investor succession. The owner’s investment, to put it simply, changes hands with another investor.
In a research survey, Scholes (2009)1 found that there are several equity value drivers, or strategies, that a founder, owner, or investor will look for prior to, during, and post succession. The most common strategy is to increase operating efficiency or increase operating income (EBIT). Another method is to increase sales. The implementation of these strategies depends on the successor CEO or executive. Scholes recommends installing a non-executive director on the board to monitor the succession plan implementation early. This will yield higher return for the new owner/investor. Scholes also determined that having a founder/owner stay on as a consultant for a period of time often resulted in better performance and a smoother transition.
2) Employee succession
Employee succession often begins with the formation of a key management team in which a business can operate and function with or without the owner present.
According to research from Wei (2003)2, there is a positive correlation between succession planning and investor wealth. Employee succession often occurs 1) when there is an internally identified successor promoted to CEO, or 2) when a successor is an outside replacement of the CEO. Wei further recommends that the board closely monitor the succession planning process. This helps proactively increase the overall investors’ wealth or shareholder equity value.
3) Customer-driven succession
Customer-driven succession is built on the sustainability of product innovation, relationship, and image built around the founder or owner’s vision.
Apple’s brand and products in the last decade were the results of Steve Jobs’ vision. When he passed away, it took new CEO Tim Cook a couple of years to restore the confidence of the board as well as consumers. Many other companies have been much more proactive than Apple in having a successor in place. In April 2011, Oracle announced their next CEO in line would be Safra Catz3. In September 2014, Safra Catz became the new co-CEO with Mark Hurd. Microsoft promoted Satya Naclella4 to CEO in February 2014 to replace Steve Ballmer, who ran Microsoft from January 2000 to January 2014. Leadership, by keeping the focus on innovation, relationships, and image, can ensure a smooth transition with and for a new leader. Customer-driven succession creates sustainability.
Succession planning, with a focus on working toward employee drivers, customers, and investor successors, will yield a better return on investment for you as the founder/owner. Your overall succession strategy may take several years (hopefully not 40!), yet you can remain agile and flexible, ready to accommodate changes when they arise.
So if you feel like business has become routine—with the day in and day out pursuit of growth and profitability making you feel like you’re wandering in the wilderness—you’re not alone. A succession strategy and implementation firm like mine can help you.
Regardless to whom you sell, we can help you determine the right succession strategy for sustainability of your team, customers, and investors—implementing and monitoring your return on investment along the way. Because you, too, deserve to enjoy the “promised land.”
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1Scholes, L., Wright, M., Westhead, P., Bruining, H., & Kloeckner, O. (2009). Family-Firm Buyouts, Private Equity, and Strategic Change. Journal of Private Equity, 12(2), 7-18.
2Wei, S., & Cannella, J. A. (2003). Will Succession Planning Increase Shareholder Wealth? Evidence from Investor Reactions to Relay CEO Successions. Strategic Management Journal, 24(2), 191. doi:10.1002/smj.280.
3Safra A. Catz. Retrieved from http://en.wikipedia.org/wiki/Safra_A._Catz.
4Kovach, Steve. (Feb, 2014). Microsoft Names Satya Nadella CEO.Retrieved from http://www.businessinsider.com/microsoft-ceo-satya-nadella-2014-2.
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