Readiness Analysis

Grooming Your Replacement

It’s a fact! A business that operates independently of the owner is more valuable than a business that relies extensively on the owner for its success. Maximum business value can only be realized when a buyer acknowledges that the business is able to operate successfully, independent of the owner(s) being directly involved in the business.

Introducing new operational leadership during your succession process may appear to conflict with the objective of maximizing your business value. However, to maximize business value, you as the owner must strive to concentrate on working on the strategies of the business, while mentoring others who are managing the daily activities. Devoting time to successfully replacing owners at the operating level, will minimize business risk and increase the value accordingly in the eyes of prospective buyers.

Knowing that there is someone who can step in and take over an owner's leadership role and operational responsibilities, is critically important to the future sustainability of the business. It is necessary that this one individual, or this group of individuals, have the necessary management experience and knowledge of the industry to take over. If not, then the transition plan should address the training and mentoring needs of an owner's chosen successor(s).

You have indicated that a leader has been identified and notified of you intentions. It is important for the company to have an action plan to ensure that this individual(s) is being groomed appropriately to assume your responsibilities, so that they will feel sufficiently equipped and externally supported. Providing for the future leadership and survival of the business, should something tragic and unforeseen occur to you, as the owner, is a heavy responsibility.

The commitment in time devoted to this gradual transfer of knowledge, along with the development of appropriate skills, will require your continual focus, attention, and re-evaluation as the business develops, or you run the risk that this individual will be unable to carry on, quickly destroying business value that took you so many years to build.

Reaching an arrangement that provides you with the assurance that key team members will remain with the business to assume such critical responsibilities, is comforting and important. Ensure that this commitment remains strong over time, by not only asking for reassurance, but by providing ongoing coaching and development opportunities for successors to test their abilities while carrying out some owner tasks, or to have them directly involved in decisions that you typically are comfortable making on your own.

It is important for owners to consider formalizing arrangements in some way, to provide assurance to future leaders with the motivation and appropriate reward for them doing so. There are many possible options available, and company advisors should be consulted in determining which might serve you best in ultimately satisfying your goal of having these future leaders stay with you over time.

Some of the many examples that can be used, are the issuance of “phantom” shares, or contractual “stay” bonuses. However, it is most important that management team members have sufficient incentive and protection for agreeing to remain with you, in assuming required company leadership responsibilities when called upon to do so.

Along with you as the owner(s), chosen successors must commit adequate time to this gradual transfer of knowledge along with the personal development of their individual leadership skills. It will require continual focus, attention, and ongoing re-evaluation as the business develops. This must form an integral part of the regular performance review process of the designated individual(s), as owners cannot afford to run the risk that their chosen individual successor(s) will be unable to carry on in their absence.