CHAPTER 1

Two People Walk into a Conference Room

The moment you doubt whether you can fly, you ceasefor ever to be able to do it.

—J.M. Barrie, Peter Pan

The stage is set. Dim the lights. Cue the actors.

Scenario One:

John W. Owner calls his prospective son-in-law, Albert, into theconference room at his company's headquarters for a chat. GeneralEquipment Manufacturing (GEM) makes and sells conveyor systemsand was established by John's great-grandfather in 1897. It has beenfamily-owned and family-managed ever since, but now John is gettingolder. He's sixty-seven and in good health. He and his wife, Marissa,have one child, Rebecca, who is twenty-two and is engaged to Albert.Their wedding is three weeks away.

Albert is a fine young man who recently graduated with an MBAfrom a nationally known business school, but he has no businessexperience. His father and grandfather are lawyers and his mother is asocial worker.

John has already offered Albert a job with GEM as a salesassistant.

Albert thinks that John wants to go over some of the wedding plans.But John looks very serious and his brow is knitted with concern. Thebig smile on Albert's face suddenly disappears as John begins to talk.

Scenario Two:

In a variation of the first scenario, we still have GEM and John, butin this version there is no Albert. John wants to talk to Rebecca abouther future. Rebecca is in her senior year at a well-known liberal artscollege and is considering taking a year off after college to tour the worldwith her friend, Emily. She is majoring in philosophy.

Rebecca sits down in the conference room across from John andlooks expectantly at her father as he begins to speak.

Scenario Three:

This time we still have GEM and John, but there is no Rebecca. Johnhas had a very successful career in building GEM, but he and Marissawere not blessed with children of their own. The company has beenJohn's surrogate child. He has raised it, nurtured it, and presided overits growth. GEM today is double the size it was when John took over asCEO from his father, Jeremy, twenty years ago. John is getting restlessand wants other challenges in his life.

John has worked very hard to build a strong management team. Hehas a CFO, Elliott Spencer, who has been with him for fifteen years.His national sales manager, William First, has been with GEM for tenyears. The VP of Manufacturing, Paul Burke, has been with GEM forseven years. Jillian Stewart, VP of Marketing, has been with GEM forfive years. In addition to these four senior officers, John has broughtin strong middle management. He has assembled a team of sevenadditional key personnel who are in sales, human relations, marketing,and manufacturing.

John has called for a meeting with his senior management team.They usually meet every Monday morning to go over plans for the weekahead. But this is Friday afternoon and they are all curious what's onJohn's mind. They begin to fidget and squirm as John starts to talk.

Scenario Four:

In yet another version, John still runs GEM and has the samemanagement team. Rebecca is once more engaged to Albert. But thistime John isn't the one who initiates a discussion about succession.Elliott Spencer, CFO, and Paul Burke, VP of Manufacturing, are havinga cup of coffee one Thursday afternoon. They've worked closely togetherover the years and trust each other implicitly. Lately, they've seen hintsthat John is starting to slow down, and from offhand comments they'veheard him make, they think he may be considering stepping down oreven selling GEM. They have no idea about what role Albert may play.Elliott and Paul start to think about what might happen if John decidesto leave, much less sell the company. "Paul," Elliott says, as he looksdown into his coffee cup, "Let me ask you something."

Scenario Five:

John and Marissa have three wonderful children who all graduatedfrom college, and John is considering offering two of them, Biff andBob, positions in the business. The third child, Adriana, is going to lawschool. John is mulling over what he should do about inserting Biff andBob into jobs at the company and whether he should make provisionsnow for them to own stock. If so, what does he do about Adriana? Sohe calls a family conference for Sunday afternoon. He's not sure howto begin, so he starts to talk about his great-grandfather and how thebusiness got started. Biff and Bob look bored, and Adriana could careless. John stops giving the family history and stands up, puts down hisglass of wine, and starts to speak from his heart.

Scenario Six:

John has been building GEM over the years and is proud of hissuccess. He's built a strong management team and has rewarded themgenerously with annual cash bonuses for their performance. He's beenthinking about starting to make gifts of stock to his children—Rebecca,Biff, and Bob—but he just hasn't gotten around to meeting with hislawyer and his CPA. This morning John got a phone call from CharlesMorrison, CEO of one of his competitors, Giganticom.com. Charles tellsJohn that he's prepared to buy GEM for a price that John never thoughthe would ever get for his company. The amount staggers him. Gosh, hethinks. This is great. Now I can get some equity to my family and my keyemployees and they can all share in this great opportunity. Suddenly, hebegins to wonder if he has time to do that now. He picks up the phoneto call his lawyer.

Stage Manager's Notes

These scenarios, or versions of them, play out every day in America.For every Facebook, Google, or General Electric, there are literallythousands of privately-owned businesses that are constantly wrestlingwith the issues of transferring wealth, finding and retaining qualifiedpersonnel, and looking to forge an exit strategy for existing owners. Allof these issues are part of the fabric of succession planning. As we will see,succession planning involves a great deal more than simply designatingan heir apparent for the business. For a succession plan to have any truemerit and to really be effective, it must incorporate solutions for all ofthese subjects.

You should also note that although each of these scenarios isdifferent, there are a number of common threads that run through allof them.

First, John has not created or implemented any kind of successionplan. His legacy, such as it is, lies firmly (or not so firmly) in his mind.Nothing has been translated into action. As it stands, no one but Johnhas any clue yet as to what type of ownership or management transitionJohn may have in mind.

Second, in all of these scenarios, there is an undercurrent ofuncertainty and anxiety among the people who have a stake in thebusiness about what the future may hold for them.

Third, whatever John is about to say to Albert, Rebecca, hismanagement team, or his family, it's going to be something that willchange their lives and their relationship with John.

Fourth, while it may seem obvious that the people to whom John isabout to speak are nervous, it may not seem as obvious (but it is no lesstrue) that John is nervous, too.

Fifth, John is not operating in a vacuum, and just as he is havingthoughts about succession, so are his key people.

Sixth, time is not John's best friend right now. The longer heprocrastinates—something tells him—the harder this is going to get.

We won't go further with these examples right now, but we willcome back to them later to see how these meetings might have faredand how different the circumstances might have been had John createdan effective succession plan.

One question should immediately come to mind as you begin tothink about these scenarios or others that may have popped into yourhead. Why would any successful businessman not do something aboutthis? Why would someone who has navigated the shoals of treacherouscompetitors, endured volatile markets, and experienced the highs andlows of business not prepare his family, his company, his employees andhis customers for what will be an inevitable event—later if not sooner?By inevitable I don't just mean death or some other catastrophic event.By inevitable, I mean the evolutionary arc of any enterprise as it developsfrom an entrepreneurial start-up to an institutionally managed, if notowned, business.

If these scenarios paint a fairly typical picture of different ways thatthe need for succession planning becomes apparent, and if they areprototypical of life in the privately-owned company world, then—toask the question we did before but somewhat differently—why on earthare business owners so loath to come to grips with it?

There are many reasons that otherwise sane and rational peopleavoid this topic like the plague.

First, for an owner to be willing to consider succession, he mustconfront his own mortality. While death may not be the only reasona successor is needed, it is the reason that first comes to most people'sminds. Let's face it; death is a scary subject. It's the same reason thatmany people put off writing their wills or purchasing life insurance.One likes to think (even if he knows otherwise) that he will live to aripe old age, surrounded by doting family members who wait patientlyand breathlessly for the patriarch to award the birthright to a loyal anddevoted child as he prepares to shuffle off this mortal coil. Others maytake a more cynical and stoic attitude and feel that, since they came upthe hard way, let their survivors deal with the problem. It won't matterto the current owner, who will by then be beyond caring.

It is not easy for someone to contemplate what will happen afterhe is gone, much less deal with the issues that this unhappy eventwill precipitate. And so one procrastinates and delays and delays anddelays. Perhaps the owner thinks that natural selection will occur anda successor will emerge from the current lot of contenders. Perhaps awhite knight will come along—someone who embodies all the finequalities that the owner finds so sorely lacking in his current cropof descendants or managers. Perhaps a buyer for the company willsurface and rescue him from these difficult decisions. There are somany possibilities to hope for. But, as one wise man once said, "Hopeis not a strategy."

There are more reasons, though, why owners avoid the subject ofsuccession planning. A successful and dynamic owner typically believeswith all his heart that he can still run his business better than anyoneelse. He's not ready to retire or transfer control to anyone else. He's noteven willing to think about grooming someone for that task.

Moreover, whether or not he has been blessed with children of hisown, he has treated his business as his child, in some cases like a lover. Hehas devoted his energy and mental and physical strengths to nurturingand supporting this enterprise and he has sacrificed many things—particularlytime—so that his business would grow and prosper. Toeven think about letting that go and surrendering his beloved companyto someone else—much less to a stranger—is more than unsettling; it'sdownright unthinkable.

There's more. Given the dynamics of human relationships, an ownerbelieves that if he brings up the subject of succession—and actually doessomething about it—he is bound to alienate one or more of his trustedfamily members or key employees. How can he anoint a successor, muchless plan for that eventuality, without running the serious risk of losingsome key people on whom he has depended—or alienating one or moremembers of his family? He may also think: since retirement is so far offand I'm in excellent health, why stir the pot now?

Finally, if an owner begins to think about succession, he soonrealizes that it is a multifaceted, complex subject. There are so manyvariables and issues to consider. How does one even know where tostart? Also, he may need to contend with certain pressing issues on adaily basis: disgruntled employees, unhappy customers, recalcitrantsuppliers, fierce competitors, a new kitchen, or a nasty slice in his golfgame. Why tackle something as difficult, daunting, and seeminglyunpleasant as succession planning?

The truth is that the subject of succession planning is more oftenthan not left untouched and ignored until it is too late. Successionplanning is avoided like the plague because a business owner often feels(even if he won't say so) that if he starts to deal with it, he will catchsome dreaded disease (not necessarily the plague) and bring aboutsooner rather than later the very consequence that a succession planprescribes—his own demise.

From the employee's perspective, while there may be a sense ofurgency or discomfort over the lack of a succession plan, there is alsothe ambivalent sense that—as long as no succession plan exists—everyemployee still has a chance to catch the brass ring. However, the lack of aplan fosters (unintentionally or not), a competitive environment which,to some owners, may seem productive. However, if one examines thismore closely, one sees how corrosive this internal competition can be.It doesn't take a psychologist or human resources expert to understandthat when two or more people are vying for attention—if not for thehighest rung on the ladder—competition will inevitably dampen ordestroy any sense of collaboration or common purpose. It will alsoset good people against each other, often with unintended and awfulconsequences.

So, let's take a look at this subject and examine what makes aneffective succession plan. In doing so, perhaps I can remove the mysteryand the myths about it and let sunshine in on this virtually unexploredcorner of the business world.

First, I will describe some of the more common myths and mysteriesthat persist about succession planning.

CHAPTER 2

Peeling Away the Myths and Mystery

I love it when a plan comes together.

—Colonel John "Hannibal" Smith(George Peppard) in The A-Team

Before I get into the nuts and bolts of succession planning, I want todispel the most common misconceptions and myths about it. Also, I willtry to eliminate some of the mystery about what succession planningis—and what it is not.

Let's first talk about the myths.

Myth One: My life is over.

The first myth about succession planning is that it is an "end of life"decision. Many people believe that if they start to think about successionplanning they are, in effect, foreshadowing their own demise—or, if nottheir actual demise, then at least the beginning of a downward spiraltoward it. This is just not so. First, as I have already pointed out and willtalk more about later, succession planning is very much a part of a living,dynamic business process. It can and should be a liberating experience,not a painful or threatening one. To a large extent, much of the attitudetoward succession planning depends on the owner's perspective andattitude. If he believes he is setting the groundwork for the next levelof growth for his company and, furthermore, that he is establishinga sound foundation for his family's future, then he will approach thesubject with enthusiasm. On the other hand, if he believes that he isopening the door for his imminent departure from the company, hewill either not proceed or will do so with great reluctance.

Myth two: It's too difficult.

The second myth is that succession planning is just too difficultto understand and too hard to deal with. One of the most persistentimpressions about succession planning is that it is too complex andcumbersome. It requires an owner to consider subjects about which hemay be ignorant or ill-informed. Consequently, most owners don't wantto deal with it—especially if the business is running smoothly, profitsare up, customers are growing and expanding, and morale is high.And if the business is having problems, especially financial ones, thensuccession planning is the last thing an owner wants to think about.He's dealing with survival.

It is simply not true that the subject of succession planning is toodifficult to understand. Nor does it have to be overly complex. In itsbasic terms, an effective succession plan is another business strategy.It is no different in its basic form from any other business strategy thatdeals with entering new markets, targeting new customers, providingincentives to employees, or deciding what new equipment to buy orlease. When an owner makes those decisions, he relies on good advice,especially his own. He makes a calculation of the risks and rewardsof allocating business resources to a new project; he tries to figureout whether the return on that investment is sufficiently assured—or,conversely, whether the risk to the business of not making thatinvestment is too high to warrant moving forward.

So it is with succession planning. If one breaks the process down intodigestible components and deals with them separately—and then bringsthose components together into a holistic, systematic process—then theoften-perceived complexities break down into quite understandableand manageable pieces.