Succession planning: a case history

Every owner of a successful privately owned company must eventually confront an important question: What sort of future will the company have when you retire? Although I am not ready to retire yet, I nevertheless found myself being asked this question more and more often over the last few years.The firm I formed in Wolfeboro in 1984 is an independent wealth management firm. The families we serve select us largely because of the quality of our staff and our ability to deliver objective advice. And they want assurances those qualities will be preserved. While an obvious choice would have been to sell the company to a larger competitor and cash out, it was equally obvious that this could have been a disastrous choice from the perspective of key employees and the families we serve, because our core values of independence and objectivity likely would be compromised at some point.Our succession planning project took about two years – one year for study, analysis, discussion and preparation, and another year for the first stage of implementation. The preparatory work included many hours of discussion with senior staff to gather information, address their concerns and keep them informed as the planning progressed.Planning for the company to remain independent required that we address many difficult questions, including: • When is the best time to begin planning for succession? • Is the founder really ready to transfer authority and control to someone else? • Should the new leader come from within, or be hired from the outside? • Can we successfully develop the future leader from within our own ranks? • If we hire an outsider, how can we be sure that the new leader will work out? When we appoint a new leader, will we risk losing one or more key people to opportunities elsewhere? • How will customers react to the announcement that the founder is starting to transition key responsibilities to others? • How can key employees afford to purchase the company? Will the current shareholders agree to sell at a value that is low enough for key employees to be able to afford to purchase shares? What tax planning issues are involved in this decision? • What is the most appropriate governance structure for the company’s future? • How should we handle the details of transitioning authority and responsibilities for leading the company? How quickly should the transition occur? • What ongoing role should the founder have, if any? • What if the succession plan does not work on the first try? • What, if any, outside assistance do we need to help with succession planning?The owner’s obligationOne of the keys to a successful internal transition is having at least one employee who wants to bear the risks and responsibilities of being a business owner. Often, there are no employees who want to assume that burden – that’s why they became employees rather than starting their own businesses. Many entrepreneurs have difficulty attracting and retaining employees who are strong candidates to succeed the entrepreneur.We made extensive use of a battery of tests administered by consultants who are experts in succession planning. The feedback from the test results helped senior employees learn about their strengths and weaknesses as leaders and managers. This process eventually resulted in the selection of a capable candidate who was already a member of our team.Once our new leadership was announced, it quickly became evident to me that I had a major obligation, which is to ensure I made room for others to provide direction and exercise control. I had to allow our new leaders the freedom to manage in their own way, which might be very different from my style.This requires constant vigilance on my part, to avoid interfering. Employees are like finely tuned antennas constantly searching for signals from the company’s leadership. A signal that is ambiguous or contradictory is bound to have a negative impact.Succession planning is far more complicated than most founders may realize, and a successful transition requires careful planning. I can testify that the rewards are worth the effort.Roy Ballentine is founder of Ballentine Partners, Wolfeboro, a national wealth management firm.