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Planning for succession? Don't become "Old Mr Grace"!

If you own a business - assuming that you are not planning on going "bust" - there are only 3 potential exit routes open to you:

- "Go public" - very unlikely - so I will ignore this here.

- 3rd Party Sale - a very structured process  - "just build a business that looks like one somebody will want to buy!" - there are only relatively few things that buyers are looking for - so it's a relatively easy process to plan for 

- Business Succession - well that's a lot less structured - it's a "windy, idiosyncratic path" - and needs a tailored strategic plan designed to suit your particular circumstances.

That relative complexity is partly because there are so many variations on a succession (family succession, management succession, mix of family/management, professional partnership successions etc). However, they all have one thing in common:

The people who are going to "pick up the baton" and take the succession forward are fundamental to the ongoing success of the plan. Most retiring business owners don't give enough thought to the attributes of the team that will follow them.

In fact they don't even give enough thought as to whether the "new guys" following them are the "right type" of people to keep taking the business forward. There are 2 broad categories of people - "Employer types" and "Employee types".

The best way to explain the difference is to think about bacon & eggs. There are 2 animals involved in the process of making bacon & eggs - pigs and chickens. The pig is 100% committed to the process of making bacon. The chicken on the other hand, is really, really important to the process of making eggs - but they are just not as committed as pigs!

Similarly - natural born business leaders are "pigs" (100% committed to their business success) - while natural born employees are "chickens". They are really, really important - but they have a life outside of their business -and they are not "all in" to the same extent as the "owner-type".

One of the first mistakes most outgoing business owners make when anticipating a business succession is to assume that the "new guys" will be just as motivated as they are - and that they will be "pigs" too. Not necessarily true - but it is 100% important that those "new guys" are similarly motivated and committed to the ongoing business success. There is no guarantee  that your family members or non-family members of your management team will be (or even want to become) "pigs"! They just may not want or thrive on that responsibility. They may be natural followers - not leaders.

What is certain is that the right team culture is key to a successful succession plan. That means - as business owner - you need to be working on this years in advance to instill that culture and those values that are fundamental to long term success.

Your team needs to be "engaged" and "buy-in" to the succession plan. That means you need to share your vision of succession with them (particularly the key players) well in advance (and that does not mean a couple of weeks!). When I say "share your vision" - actually they really need to have a big part in actually "shaping the future vision". It needs to feel like something that they want to aim for (not something where you can tell them what it is - see "leaders" v "followers" above).

The team culture needs to be strong enough to survive the transition. That means you need to instill something comparable to the Red Sox culture of 2013 ("beards" and all pulling together) rather than the Red Sox culture of 2012 ("beer & chicken" and back-biting against the management). As Drucker said -  "culture eats strategy for breakfast".

Next you need to think about how to motivate your "New guys". 

Essentially what you are trying to create is a balance between CERTAINTY and OPPORTUNITY. 

The business owners who will be leaving ("old guys") are usually looking for certainty. Certainty that the business success will continue - but also certainty that they continue to reap financial rewards (they will perhaps still own shares in the business, and are consequently relying on dividends in future years to supplement their financial resources). They typically want to minimize their risk of it all going "pear-shaped", particularly from a financial viewpoint.

The team who are going to "pick up the baton" ("new guys") are usually looking for opportunity - particularly financial opportunity. If they grow the business value going forwards (but shares are still going to be held - at least to some extent - by the "old guys") how are they motivated and rewarded? Is it transparent? Too often outgoing owners think words like "trust me - I will see you right" are going to be sufficient. They will not be.

Above all else - don't become "Old Mr Grace" - and wait too long to start planning!

Most business owners understand that if they are planning for an eventual sale - they need to plan well in advance and really concentrate on "getting the timing right". If you are planning for a sale you need to sell the business while it is still in growth mode (buyers will pay a higher multiple if they can see "blue sky" ahead). The last thing you want to do is sell when you are on the "down-slope". You need to be planning for a business sale from a minimum of 3-5 years out - partly because you don't know exactly when the "stars will be perfectly aligned" to maximize value (some things will always be outside your control).

However, many business owners think that planning for a succession is easier - and that they have more time ("maybe next year"). In so doing they become "Old Mr Grace" (a fictional character from a British TV comedy - "Are you being served?"). In that program Old Mr Grace was still around - but really he was well past his "sell by date". The time to put strong succession plans in place is when you at the "top of your game" - when you do have time to make the right choices and build the right succession team. Not when you are too tired and don't have the energy to tackle change in the way you once could.

So - if you own a business - and you want to "create a legacy" via a succession plan - don't wait too long - and don't become "Old Mr Grace"!

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