This article was written by David Ciamballa, partner with the Rawls Group.
You may recall an accident a couple of years ago where a pilot encountered inclement weather while attempting to land in Buffalo. Following the accident, the National Transportation Safety Board (NTSB) issued a statement from which we learned that the pilots apparently lost focus as they were engaged in idle conversation while descending below 10,000 feet. By the time the pilots recognized they were in trouble there was little they could do as the plane spiraled out of control. As a result more than fifty individuals perished, including the two pilots. From the NTSB statement, it appears the main reason for the accident was the pilots’ lack of necessary preparation and experience to realize they had lost fifty-six miles per hour of speed in a short period of time. What a tragedy.
The fact is, many of us take for granted the amount of time, energy and commitment a pilot must invest to gain the necessary education and experience to become a licensed pilot. Those of you who fly airplanes understand the countless hours of study, practice and simulation that must be endured. In addition, teamwork is essential between pilots, air traffic control and the ground crew.
So what does all of this have to do with ownership and succession?
Circumstances impacting the continued success of your business can change just as rapidly as the weather, especially without proper preparation and teamwork. Statistics show approximately thirty-three percent (33%) of businesses make a successful transition from the first generation to the second and only ten percent (10%) successfully transition to the third generation. For the businesses that did not experience the “smooth landing,” in many cases, the next-generation “pilots” had adequate talent and skills but were not properly prepared to read the business gauges and operate a business that was not optimally structured for inclement circumstances. While I appreciate this may be a harsh analogy in that business succession is not a matter of life and death like landing a plane, from a stewardship perspective, the survival and continued success of your business will impact your financial security, your spouse’s financial security and the livelihoods of many others who depend upon your business including family members, key managers, employees, strategic vendors and your greater community.
In order for your business transition process to “experience a smooth landing”, especially if your goal is to perpetuate your business through a family member or a key executive, consider the following four key areas for your planning:
Have a “flight plan” that clearly expresses where you are going and how you are going to get there, including your exit strategy.
Implement “flight simulation” for your successor by developing a complete training plan so your successor can assume a leadership position and eventually assume command and control.
Become skilled at “reading the instruments”; Listen to your family and advisors and respect individual/generational differences.
Appreciate that “each pilot may take a different flight path” but the destination is the same. Things that come naturally to you may not necessarily be natural for your successor.
The Flight Plan:
Pilots are equipped with a flight plan for taking off and landing. Your business is no different. Prior to starting your business, you developed a business plan to help your fledgling business take flight. Survival and ultimately building a profitable business were most likely your objectives. It is highly unlikely you visualized incredible success and one day transitioning your business. Landing your business smoothly requires you to think about life after a leadership transition. This is a difficult exercise for many of you since your business likely represents a large part of your identity. Simply put, this is a lifestyle issue! Important questions that will help you develop your personal “flight plan” include but are not limited to:
When is the optimum time to pass the baton?
Who is the best candidate to lead the business in the future?
What will happen when and if you give up control?
How will you fill your time when you are no longer involved in the frenetic pace of running your business?
Where will you live?
How much income will you need?
What impact do you want to have on your community?
Will you completely remove yourself from the business or will you remain involved in some capacity?
Does your successor have the financial means to purchase your stock?
Answers to some of these interesting questions can help you formulate a plan that will assist you in reaching your destination safely.
Once you have identified the most capable successor, develop a three- to five-year comprehensive training program that exposes your successor to various aspects of the business. Areas of focus and learning objectives could include: operational experience, understanding financial statements, understanding performance metrics, managing team members, building relationships with franchisors, lenders and strategic vendors. Most importantly, put your successor in a position where their attitude and work ethic can be witnessed by the managers and employees he or she may someday lead.
If your successor happens to be a family member, consider utilizing a non-family member as a mentor. Ensure your successor receives consistent feedback and accountability throughout the training program. Ultimately, your successor should be tested in the leadership chair before assuming command and control of the business. This is equivalent to “flight simulation” for a pilot. Wouldn’t you want to know in advance if your successor could run the business you worked a lifetime to build? Gentle and smooth landings are a result of proper preparation, effective communication, having clearly defined expectations and performance accountability.
Reading the Instruments
Respecting individual and generational differences can play an important role in whether your flight stays on course or you veer off in another direction. No matter how well prepared you are, you will undoubtedly encounter turbulence along the way especially since you are dealing with unique personalities and conflicting generational perspectives. Consider the following:
Senior generation typically started with nothing, avoids debt, travels coach, works weekends, and stays at the Holiday Inn, whereas
Younger generation begins with a strong financial base, takes on debt, travels First Class, demands family time and stays at the Ritz Carlton.
Sound familiar? I bet it does! You will want to equip yourself with enough information to ensure you remain confident and calm under stress. There are “instruments” available to enhance your understanding of how your successor will react under business stress. These powerful instruments can help minimize a great deal of frustration and help you avoid conflict as you prepare your business for a transition. Readings from these instruments may reveal you have a need for control or dominance while your successor may be more comfortable in a supportive role. You may make decisions based upon emotion (intuition), while your successor makes decisions based upon gathering many facts. You get the picture.
Can you see how differing personalities can create a combustible environment if individual differences are misunderstood and not respected?
Appreciating “other” Options for the Flight Plan
Appreciate that “each pilot may take a different flight path” to arrive at the same destination. Working with dealers, oftentimes I have found that critical information and business metrics are often stored in their memory. Like an experienced pilot, making decisions and feeling the pulse of the business have become second nature to them. You and your successor may make different decisions to arrive at the same goal. Recently I worked with a dealer who had transferred operational responsibilities to his successor who happened to be his son (let’s call him Sparky). Sparky is a very bright individual who is committed to the business but presently lacks experience. He has not had the luxury of experiencing a normal business cycle that required him to make critical decisions regarding personnel, managing inventory, minimizing expenses, advertising etc. Conversely, his father had experienced numerous business cycles and was adept at making decisions quickly in a down economy. Over the past thirty years he learned valuable and costly lessons through the school of hard knocks. During a recent review of the financials, Sparky’s father expressed his frustration stating “this is not a difficult business to operate.” Without ever coaching his son, the father assumed Sparky knew what adjustments should be made to navigate changing business conditions. Remember, what has become second nature for you is not necessarily true for your successor. It is likely you and your successor share the same goals but may go about achieving them in different ways. Coaching and patience are imperative!
The decisions you make today could determine how “friendly” the skies are for you in the future. Leaving succession to chance or ”flying without gauges” could determine whether you approach the runway on a steep course and land abruptly or potentially skid off the runway resulting in a business fatality. Preparation is key! You must have a clear flight plan to meet your objectives, but you also need to understand the objectives and desires of your co-pilot and crew. Involve your entire crew such as key employees, key family members in the planning process and invite their spouses to planning initiatives to assure a great landing and smooth transition. Working as a team will result in better decisions, better plans, enhanced business performance and greater “blue sky.”
David Ciambella CFP® is a partner with The Rawls Group. Nationally recognized, The Rawls Group specializes in business succession planning by addressing the issues that impact the continued success of a business legacy. For additional information contact David at 407-718-4587