WHERE TO BEGIN
Most succession planning initiatives begin with a question of valuation: what’s this company worth? It's a key question, but buried within it is another question: to whom? That’s the question on which the incoming and outgoing generations often don’t see eye to eye, and that’s where succession preplanning comes in.
“The corporation isn't a sturdy species. In fact, only a tiny fraction reach the age of 40.”
Source: Charles I. Stubbart and Michael B Knight
Typically the outgoing generation is basing its valuation on 35 or 40 years of blood, sweat, and tears, of figuring out how to make a profit and take care of customers and build a reputation and hire and train and hundreds of other things that go into keeping a going concern going. Sometimes they have a specific number in mind they’re trying to hit in order to fund retirement, and it’s natural for them to believe that the value of an ongoing concern and the lack of startup risk the incoming generation will have to bear is worth a premium.
By contrast, the incoming generation is looking ahead to the next 35 or 40 years, handicapping the company’s prospects not on its impressive past but on an unknowable future. They’re trying to continue customer care and keep the company relevant and profitable and growing and thriving, keeping all the cash they can in the business to minimize the likelihood they’ll have to manage not a startup, but a shutdown. The business has clearly been 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. 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 both sides may be tempted to accuse the other of being greedy, basing their value perceptions on different assumptions. It’s the reason 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.
This lack of alignment is the most paralyzing internal dynamic that bedevils succession planning efforts. If the relevance factor isn’t formally taken into account (because no one recognizes it as an issue or even knows how to frame it), a succession plan has little chance of success.
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. But what’s often missing is an understanding of how differing expectations arise, why they’re all legitimate, and what can be done to prepare for them.
It doesn’t matter how successful your company has been for the past 40 years. What matters is how successful it will be for the next 40. Align both parties around that idea and it’s amazing how quickly other issues can be worked out.
