Planning for succession
Published by Graphic Arts Monthly
October 1, 2004
Planning for Succession:In an industry dotted with family-owned businesses, principals are famously hesitant about this crucial issue.
Paradoxically, making plans to pass along a business or its ownership to someone else is something that most printing company managers and owners ignore. But not taking the time to plan for succession can have grave consequences, especially given that the second most common reason that businesses fail is the failure to plan for succession.
"There's a natural hesitancy for principals to deal with succession issues because they associate it with death, and who wants to think about that," says William J. Rothwell, PhD., professor of human resource development for Pennsylvania State University, State College, Pa. Rothwell is also president of Rothwell and Associates, a consulting company, and author of Effective Succession Planning.
But like it or not, says Rothwell, managers and owners have a responsibility to their employees to ensure the successful continuation of the business.
One important factor complicating succession planning in the printing industry is that many firms are family owned, so deciding who gets the baton can be quite difficult. Indeed, the decision has ripped families apart.
Still, if an owner plans to retire and wants a hand in determining the future of the firm, he or she must establish and implement plans for succession. The default alternative--ceasing operation--is seldom any owner's first choice; rather, it's usually a last resort that yields scant value in terms of tax considerations or equity.
Ernest A. Doud Jr., a co-founder and the managing partner of DoudHausnerVistar, a firm of family business advisors, says six core components comprise succession planning:
- Founder's transition
- Family transition
- Business transition
- Management transition
- Ownership transition
- Estate planning
A common mistake that companies make in this area, observes Doud, who is also an author, is to focus too much on tax issues. "I'm not saying that successions plans shouldn't be tax efficient," he concedes, "but tax-driven planning usually misses some important points."
The transition plan should also outline financing issues, advises Joseph P. Truncale, CAE, president and chief executive of the National Association for Printing Leadership, Paramus, N.J. He says, "Transition plans should include how to value the stock, how stock is to be distributed and when, along with other financing issues."
In actuality, many succession options exist, such as selling the business to other family members, to a company management team, to a third party, or to employees.
Also, there are many turns that succession planning can take based on the situation, advises Joe Becker, principal of Becker and Company, Lanham, Md., an accounting, tax, and consulting firm serving the graphic arts industry. He adds, "The process starts with owners or managers identifying objectives and then assessing if those objectives can be achieved."
Not an easy task
He understands that it's not easy for busy owners or managers to set aside time to plan for successions. But if they don't, Becker cautions, they risk selling or closing the business.
Unfortunately, he continues, in family-owned printing companies, many owners avoid picking a successor in an attempt to avert family conflict. Becker says he's witnessed cases in which an owner picks one child to take over the business but then all the other children leave the company.
There's no "one-solution-fits-all" approach when planning for succession. Says Becker, "Each company's situation presents a different scenario, with unique dynamics."
Successful succession planning takes two to five years, in the view of Rick Riesgraf, president of Carlson, Lundquist & Company, Minneapolis, a CPA consulting firm that specializes in the graphic arts industry. "No matter the option--transferring the business to children, or selling to a management team or an outside third party--they all take time to plan," Riesgraf says. "Owners first need to get comfortable with the path they've chosen, then they can tackle the financial and tax issues."
In an understatement, Riesgraf says inter-family dynamics can present real challenges; he adds that he's witnessed both great success stories and great turmoil. "I've been in this business a long time and feel that I've become more psychologist than CPA, because in family businesses you spend a lot of time resolving people issues," says Riesgraf.
At the same time, observes Hal Snyder, succession planning is not a task to put on hold. Snyder, president of H.J. Snyder Associates, Inc., a human development services company based in New Providence, N.J., adds, "A company succeeds or fails based on its leadership. If no one is prepared to step up, a company will struggle."
Snyder advocates a strategy that begins with analyzing a company's current and future succession needs, including:
- determining anticipated needs in terms of succession for the coming period of one to five years;
- preparing clear job descriptions of key positions, including special skills, abilities, and personal qualities; and
- developing a timeline for anticipated replacements needed in key positions.
The "like me" fallacy
When picking a new leader, Rothwell warns about falling into the "like me" fallacy.
"There's a well-known, well-researched bias to select a successor who is a 'clone' of the current leader. But we have to keep in mind that business conditions change, so even though an owner may be very well equipped for the current situation, five years from now a leader with those similar traits may not be the right person to run the business then," says Rothwell.
He, too, advises that companies have a transition plan, saying, "You can't just toss a business into somebody's lap and assume that he or she is going to be able to run it."
To help, says Rothwell, the present owner should write a detailed job description for the new leader, perhaps keeping a log for an entire week of all activities completed, being sure to include important activities handled annually.
Also, the owner should try to identify and address gaps between the skills of the new leader and what the job requires. Rothwell explains, "Don't make the common mistake of assuming that someone who's successful at a lower level will automatically be successful at the higher level."
Succeeding in Succession
Putting to use these 11 best practices can put success into succession planning, maintains William J. Rothwell, Penn State human resources professor, head of his own firm, and the author of several books on the subject.
- Clarify the purpose and desired results of the effort. This requires executives to align the plan with business needs and take a hands-on approach to formulating, implementing, and evaluating the plan.
- Determine what performance is required. Here, Rothwell advocates the use of competency modeling, which focuses on discovering the differences in a given job category between the best performers and average performers.
- Measure performance. While competency models describe people, they don't measure how well individuals are performing within a given time frame. Performance measurement systems do this.
- Determine what performance is needed in the future. Companies need to devise a future competency model that describes the characteristics of individuals who will be aligned with organizational strategies and objectives for the long term.
- Assess potential. Compare individuals to future competency models to assess their chances of coping with an organization's future business requirements.
- Establish a means to narrow gaps. Once decisionmakers know the gaps between potential leaders' current competencies and performance (as measured by best practices #2 and #3) and between an individual's potential (as measured by best practices #4 and #5), they can establish a means by which to narrow those gaps over time.
- Follow up. Establish a means to follow up and hold individuals accountable.
- Document competence. Firms need to know and have a clear understanding of what people in the organization know and can do.
- Create, sustain rewards for developing people.
- Evaluate results.
- Lead from the front. The chief executive and senior leaders must take a hands-on approach to succession planning.
Why Founders Won't Let Go
Ernest A. Doud Jr., a business co-founder and managing partner, is the author of the family business book, Hats Off to You: Balancing Roles and Creating Success in Family Business. He has compiled 10 reasons why company principals won't let go.
- "Too many people I've known have died soon after they retired (or acted like they were dead)."
- "Without me, the business is nothing."
- "Without the business, I'm nothing."
- "I hate gardening, find cruises boring, and get sunburned if I play too much golf."
- "I need someplace to go everyday."
- "The kids want to change the way the business is run. If I'm not there, they'll change what I've built!"
- "I don't want to choose between my kids to name a successor."
- "The business is my major source of income. I have to stay active to protect it."
- "Nobody can run the business as well as I can."
- "They may run it better than I did!"