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Successful succession takes patience, flexibility

the executive’s desk

We are living in the midst of the greatest transfer of wealth in human history, with millennials standing to inherit some $30 trillion as baby boomers

Steve McKee

increasingly give way to the Grim Reaper.

Much of that wealth is in the form of closely held businesses that are being transitioned to a new generation, whether through familial ties or not. Most people don’t realize that.

What’s even less appreciated is how difficult succession planning is, and how often it fails. There are a number of common reasons, from the inability of the outgoing generation to let go to starting too late (you should plan on the process taking up to a decade or more).

False hope can be a problem, too – succession is a complicated process and it’s easy to keep your head in the sand hoping an outside buyer will come along or it will all somehow otherwise work out.

There is a thread, however, that runs through all of these reasons, and it largely goes unnoticed. Call it the relevance factor.

Many succession planners will tell you to begin the process by establishing the value of the business.

But that’s often precisely the rub. The outgoing generation may have been running the operation for 30, 45 or even 60 years. It has provided for their family, generated personal wealth, brought them career satisfaction and is an asset they believe merits continuation and valuable consideration.

But the incoming generation is looking at the next 30, 45 or 60 years. They’re handicapping the company’s prospects not by extending a straight line from the past but by projecting an unknown – and largely unknowable – future. The business was clearly relevant to previous generations of customers, but will it remain relevant to future generations? Is it losing relevance even now?

The answers to those questions are increasingly fraught with peril. Every business – every industry – goes through phases, from inception to acceleration to maturation to saturation to commoditization. We call it “the disruption cycle.”

Back in our grandparents’ day, you could spend an entire career within one cycle, which meant that you couldn’t really appreciate it turning. Like the hands on a clock, it moved – but slowly, imperceptibly. That made transitioning a company from one generation to another more straightforward.

Today, however, the disruption cycle is turning faster than ever. If a company and its owners are running out of gas at the same time, its value proposition is in need of rejuvenation just as its ownership team is turning over.

Conflicting expectations are almost a certainty. While the old guard is basing the company’s value, literally and emotionally, on what it took to get to this point, the young guns are basing it on what it’s going to take to not remain stuck there.

It’s this asynchronous view of time, value and relevance that throws an early wrench into many succession plans, resulting in misunderstanding, mistrust and, too often, missed opportunity.

The relevance factor also explains why the outgoing generation has a hard time letting go of “the way we’ve always done things,” sometimes taking personal offense to the new team’s desire for (and speed of) change.

It’s why succession decisions can easily get put off, because lack of alignment is the most paralyzing internal dynamic that bedevils companies.

And it’s what makes blind hope an alluring alternative.

There are plenty of lawyers and accountants who can furnish the formulas, set up the structure, process the paperwork, and tabulate the taxes associated with transitioning a business from one generation to another.

If your plan isn’t working, however, what might be missing is an understanding of how differing expectations arise, why they’re all legitimate, and what can be done to reconcile them.

It doesn’t matter how successful your company has been for the past hundred years; what matters is how successful it will be for the next. Align both parties around that idea and it’s amazing how quickly other issues can be worked out.

The executive’s desk is a guest column providing advice or information about resources available to the business community in New Mexico. A longer version of this column previously appeared on SmartBrief.com

 

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