Succession planning protects, builds, and sustains value. Effectively addressing the various challenging factors of succession planning builds value for you, your children, your employees, and your franchises. As I have reflected in previous articles, succession planning will be just an academic exercise if there is no confidence that the business will survive and continue under the management of future business owners. The fundamental challenge of succession planning is achieving succession success. Family business success is derived from a variety of sources. The degree of success depends upon the sources and therefore can vary significantly.
Succession success is a very specific term describing the nature and degree of success required to support the transition of business ownership and management. Succession success has a success margin sufficient to endure predictable challenges experienced in the transition of business ownership and management. The success of your business is derived from both individual and aggregate high achievement in these sources. Referred to "success factors," these sources are the critical issues that determine the stability, resilience, and profitability of a business. The challenge of succession is best supported by a broad base of strong success factors providing the stability and resilience of profits needed to withstand predictable profit erosion during ownership and control transition.
Evaluating Your Potential for Succession
Well-diversified and higher degrees of success are necessary to provide both the motivation and the momentum to achieve succession. Succession success is therefore actualized through high achievement in a broad base of success factors providing the ability to withstand predictable challenges during ownership and control transition. To help you understand the concept of succession success, the following evaluation illustrates the various factors characterizing the succession success of a business. I have concluded that there are 25 basic factors that impact the succession success of a business. This evaluation quantifies succession success by estimating "success positioning" relative to "success potential" for each factor.
Success Potential is a 1 to 10 (10 being the best) appraisal of what a business could achieve in each success factor based upon the given circumstances of the business. The first step in this evaluation is to determine how good your business can be in each category considering the limitations that are beyond your control. Success Position reflects your 1 to 10 evaluation of how well you believe you and the business are doing in relation to the previously determined potential. Based upon our experience, we have generally concluded that a current succession potential of 70% or more is a threshold for succession success, or the foundation needed to realistically begin building a succession plan (see graph below).
A Relative Succession Success (RSS) of 100% is idealistic. There are probably some businesses that are at this level, but I have not had the pleasure of meeting them. At 100% RSS, they have correctly concluded that they do not need to talk to me. On a more realistic level, our experience has also led us to conclude that an RSS of 90% or more is needed to have confidence that your business has the momentum to withstand the challenges of succession.
In the real world, we generally evaluate new clients to have RSS scores of 75% to 85%. This evaluation highlights what is usually very obvious--they need help. Our counsel is that with a concerted effort to address deficient factors, we can pull scores up above 90% and bring peace of mind that succession is a realistic goal. This evaluation is also a good tool to periodically confirm that a succession planning program is staying on track.
How do you achieve Succession Success?
Succession success is a significant achievement that requires nothing less than a significant effort. As stated above, this is a higher and broader form of success. Succession success begins with a commitment to excellence and an unwillingness to accept mediocrity in any of the preceding success factors. Does this mean you will be a 10 in each of the categories? No, because there are some circumstances beyond your control. This does mean that you are willing to make the commitment necessary to achieve a 10 in each of the success categories. This is a commitment of time, energy, and financial resources to enthusiastically go for the brass ring.
A commitment to succession success also requires a well-planned and well-orchestrated effort. Succession success is achieved by optimum performance in a broad base of factors. Effective succession planning does not allow you to be great in some factors and lousy in others. You must be good in all and great in as many as you can. Therefore your succession effort should be well planned and closely supervised by someone who can assure performance on a broad front. For the typical family business we determined that there are 25 success factors. For your unique business, however, the success factors may range from a low of 15 to as high as 35.
Regardless of whether you are on the high or low side of this spectrum, staying on top of progressive action or maintenance is a big job. As this is a specialty that I have enjoyed for 25 years, I assure you that this job is bigger than any individual (such as a family member) who otherwise has a full-time job. The best course of action is to identify an advisor to assume this responsibility. The ideal course of action is to retain a succession specialist who not only understands the concept of succession success but also has an organizational structure for dealing with multi-agenda programs.
The final prerequisite to achieving succession success is to be realistic. Self-evaluation is not an easy undertaking. Depending upon whether you are one to see the glass half full or half empty, self-evaluation brings great vulnerability to being overcritical or overly optimistic. Either mistake can cause big problems. We live in a subjective world. In order for you to achieve your goals you must make every effort to make realistic evaluations. Realism is achieved by understanding the makeup of your personality and exercising appropriate caution. It is of great importance to get third-party objective help. Seek the advice of those you trust who will not tell you what you want to hear but will tell you what you need to hear. Be even more careful if you don't know anyone whom you trust in the various success factors; this indicates that the voice you most respect is your own, which is hardly objective.
There is a reason for every succession story. Success does not just happen, it is always achieved though capitalizing on opportunity. In the family business realm, the reason is either luck or preparation. Luck can bring many good things, but it is not a form of success on which one should risk the family jewels. The most prolific form of luck is being in the right place at the right time. However, times change and luck does not endure for the long-term. The only reasonable basis for risking the fruits of a lifetime of achievement is comprehensive preparation. One of the most fundamental forms of preparation is to pursue a high degree of succession success.
Loyd H. Rawls, CFP, CLU, ChFC, MSFS, of The Rawls Company in Orlando, Florida, has specialized in family estate and succession planning for closely held, family-owned businesses since 1973. Well respected in his field, Mr. Rawls is a highly requested speaker and has published numerous articles and publications on this subject. If you have specific questions or require more information about this subject, please check the appropriate box on the reader response form on page 3.# lrawls@dealeronline.com