Get out of the Wilderness and into the Promised Land – How a Succession Plan can help you find your way

Chia-Li Chien | Nov. 06, 2014

Have you ever noticed in business, as in life, everything can become routine? The day in and day out pursuit of growth and profitability can make you feel like you’re wandering in the wilderness. And while it sustains you, you have grown tired of the same old manna. Every day. Every week. Every month. And before you know it, it’s been years of the same thing. You start to think of yourself as a Moses, spending forty years wandering in the wilderness.

Ways out of the Wilderness

It doesn’t have to be that way. There are things to look forward to and to work toward, with end results that will be rewarding as well as profitable. So let’s explore the three types of succession planning, and stop this pointless wandering.

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 owners or founder.

According to research from Wei (2003) [1], there is a positive correlation in succession planning and investor wealth. Employee succession usually can occur 1) When there is an internally identified successor promoted to CEO or 2) when a successor is an outside replacement of the CEO. Wei (2003) [1] further recommends that the board closely monitor the succession planning process. This helps proactively increase the overall investors’ wealth or shareholder equity value.

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 and his vision. When he passed away, it took Tim Cook (the new CEO), a couple of years to restore the confidence of the board as well as consumers (customers). Many other companies have been much more proactive than Apple is having a successor in place. In April 2011, Oracle announced their next CEO in line would be Safra Catzv[3]. In September 2014, Safra Catz became the new co-CEO with Mark Hurd. Microsoft promoted Satya Naclellav [4] to CEO in February 2014 to replace Steve Ballmer, who ran Microsoft from January 2000 to January 2014. Leadership, by keeping a focus on innovation, relationships, and image, can ensure a smooth transition with and for a new leader. Customer-driven succession creates sustainability.

Investor succession

Basically, any internal or external transfer is an investor succession. The owner’s investment, to put it simply, changes hands with another investor.

In a research survey, Scholes (2009) [2], found there are several equity value drivers, or strategies, that a founder, owner or investor will look for prior, during and post-succession. The most used 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 (2009) [2] 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 could result in better performance and a smoother transition.

The Promised Land

No matter which succession method you deploy, your ultimate goal is to cash out profitably, at any time. Without understanding succession planning strategies, you could keep wandering in the wilderness.

Just keep in mind, no matter which succession plan you aim for first, you will have to highlight that your business represents a solid investment and the potential for future return to investors/owners. Because no matter which of the three types of successors they are, your successors are in a sense, looking for the promised land.

Succession planning, with a focus on working toward employee drivers, customer, 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.

The good news is you are 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 of investment along the way. Because you, too, deserve to enjoy the “promised land.”

Schedule an appointment today!

References:

[1] SCHOLES, 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.

[2] Wei, 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

[3] Safra A. Catz. Retrieved from http://en.wikipedia.org/wiki/Safra_A._Catz

[4] Kovach, Steve. (Feb, 2014). MICROSOFT NAMES SATYA NADELLA CEO. Retrieved from http://www.businessinsider.com/microsoft-ceo-satya-nadella-2014-2