There comes a time in every business owner’s life when it is time to make the tough decision regarding succession. The owner may be ready for retirement or need to stop working for personal reasons. While the sale of the company is one option, in this email, we will focus on the owner retaining the Company while transferring day-to-day control to a new President/CEO.
In this type of succession planning, the owner has two options: transitioning management to a family member or a non-family manager. We discussed the first scenario in a previous email and will address the second scenario in this one.
Like any business decision, transitioning leadership when the owner retires is not a decision that the owner can make lightly as there are a myriad of considerations in choosing the right leader.
First, the owner must determine if the successor President/CEO is currently an employee or must be identified. In the case of the former, the manager may be a protégé that the owner has groomed — someone who has risen through the ranks and over time has assumed increasing responsibility. The owner feels confident transitioning the management of the company to this person since they have likely built a strong rapport with this person, trusts them implicitly and is confident in their skills and leadership ability. In fact, this person may already be viewed by employees as the successor when the owner is out of the office.
Alternatively, the successor may be hired two to five years prior to the owner’s anticipated retirement in preparation for the retirement plan. In theory, this timeframe should provide ample time for the owner to groom the heir apparent and confirm their ability to run the company.
One big caveat: Choosing a manager from outside the company could result in several “false starts.” In other words, the owner may hire a manager, begin grooming them, and then the owner and/or the heir apparent may determine that the fit is not right after all. Ultimately, “taking it slow” will confirm that the manager is capable, will uphold the owner’s values, will act in the company’s and owner’s best interests, and will be loyal and trustworthy.
It is important to acknowledge that, regardless of the successor, no one will ever run the company like the owner. Every manager has a unique style. If the owner can accept that and be flexible while allowing the successor to run the company in their own style, subject to the company’s values, the transfer of leadership responsibilities will likely be successful. Stated more directly, it is critical that the new manager feel confident that they have both the responsibility and the authority to manage the company.
In many cases, the owner will install a board of directors (that includes the owner) to provide governance oversight, set policies, etc. The manager may have the authority to make certain decisions, i.e., manage the day-to-day operations of the company and hire and fire, but may not be authorized to approve certain activities such as a change in strategy, acquisitions, expenditures greater than a certain amount, incur indebtedness, or approve year-end bonuses for employees, for example, without the approval of the board of directors. Having the manager report to a board of directors can help increase the owner’s confidence in being able to retire.
Properly incentivizing the manager is another important consideration. We will discuss this in more detail in the next email, but the owner should be aware that incentives are a critical part of the equation in successfully transferring the leadership of the company to a new manager. In short, the owner should understand what motivates the manager so they can properly incentivize them.
Transferring the leadership of the company while retaining the ownership may not be the best strategy for every owner. As we mentioned earlier, it is complex and requires forethought to ensure the successor is the right person to lead the company now and into the future. The owner must be comfortable with and trust the new manager, and it may take a significant investment of time and effort to ensure that the manager is the right fit to lead the company. With that said, promoting a new manager may be a viable option for the owner who is ready to retire and transition their day-to-day responsibilities to a hand-picked and personally groomed successor while continuing to own the company.
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