What’s your Plan B?

The best laid plans often go awry. I expect that most business leaders have experienced this truth at one time or another during their careers, and the adage is true for succession planning, as well. Just ask Bill Gross, the chairman and co-founder of the respected Pimco Bond Funds. In February, his deputy and expected successor quit the company, leaving its present and future in shambles.

Gross tried to do everything right by putting a succession plan in place, but now, at 69 years old, he has no plan at all.

His tale highlights the necessity of having a Plan B.

It takes both A and B

I spend my days convincing business owners that they need to develop exit strategies and succession plans and developing their leaders to run the business profitably and sustainably. But as owners are coming up with their primary plans, they should also develop backup plans for how to address the worst-case scenario in case the intended successors cannot or do not take over.

You can do this by developing bench strength in all of your key positions. Your primary goal is to identify the one or two people you think would be the most effective at running your business, then develop them over three to five years to prepare them for these potential roles. You also should identify two or three backups at each position to develop for possible, and hopefully eventual, leadership roles in your company. They may or may not know they’re being groomed as future executives.

The best sports teams invest in bench strength. They do not have a single player who can play quarterback. They have a bench of two or three and are always growing the skills of each member of their team.

If your transition occurs as planned, your strong bench will be critically important to supporting the new management team. And as your business continues to grow under the new leaders, growth opportunities will continue to arise for these next set of high-potential leaders.

But if your planned transition falls apart – if your identified successor decides they don’t want the job or you decide they haven’t developed the necessary skills – you now have a stable of prospective leaders whom you have been cultivating all along.

By working simultaneously on plans A and B, your risk is cut in half. While you can’t cover every conceivable option, you can position yourself for a better upside by doing your planning upfront.

Read more about Bill Gross and his plans gone awry.

Are you willing to face reality?

When you’re dealing with the day-to-day challenges of running your business, it can be difficult to keep the perspective you need to manage for the long term. That’s where a board of directors comes in. Formal or informal, these advisors can provide guidance to help your business be profitable and sustainable. They bring an objectivity to look at your business, industry and environment and help evaluate whether the people and strategies you’re putting in place are having the desired effect.

Most privately held companies don’t have a board of directors or even an informal board of advisors. This can put their leadership at a disadvantage. Sometimes the owner can get so close to the business that they focus on the day to day and lose sight of the key strategies and competitive landscape. Conversely, they can get so focused on the changing demands of the industry that they aren’t focused on the deliverables they need today.

Boards can be a powerful way to provide the fresh set of eyes that you need. You can seat a formal board of directors or an informal board of advisors.

When you create a formal board of directors, you are essentially paying someone to take on fiduciary responsibility for your company. The board is responsible to the shareholders to make sure the company is not being mismanaged and to help build shareholder value. Your expectation should be that they will reinforce and guide you in what is best for the shareholders in the short and long term, and hold you accountable to take action. If you are the only shareholder, an informal board of advisors may suit you better.

Informal advisory boards often are not paid. They are hand-selected people you like and respect, but there’s no expectation that you will necessarily take their advice and no real consequences if you don’t.

Yes, consequences. A formal board of directors can take action -- recommending changes in leadership, hiring external consultants, or driving changes in strategy or structure. They’re not going to get deeply involved in managing your business, but they can have a significant influence over what transpires at the top level. When it comes to succession, a board can also be that objective third party that pushes you to start planning for the future. They’re tuned in to whether you are potentially putting the business at risk by putting off the inevitable, and they may recommend or bring in the right resources if you won’t.

So how do you form a strong board of directors for your company? Start by identifying the skill sets that you would like to have represented on the board. It may be someone with financial skills who’s comfortable analyzing your P&L and balance sheet or playing an audit oversight role, someone who is retired from a career in your industry who brings deep industry knowledge, or someone with human resources or marketing expertise that bring valuable perspective on key issues or opportunities.

With skills identified, scan your environment for respected, credible leaders who are willing to put in the time to help your business be successful. Finally, take the time to bring them on board, orient them to your business, and share with them your expectations and how you expect them to contribute to your business success. One final note: If you are going to set up a formal board with fiduciary responsibilities, it might be wise to involve your attorney to make sure that you are setting up the appropriate structure, expectations and systems for success.

Happy hunting!

Photo by Unique Hotels Group

Three Steps to An Endless Summer

Summer is coming and that usually drums up memories of long relaxing getaways to the beach or mountains, time with family and friends, and freedom from the demands of a business…even if for just a few days. If that is starting to sound more and more appealing, it might be time to take a serious look at bringing on a motivated successor. This does not mean your exit is imminent, it simply allows you some additional flexibility to evaluate who you might invite to assume more management and leadership responsibilities, and when you might be ready to reduce your level of responsibility in the business and create your endless summer. Ultimately, it gives you the opportunity to evaluate your timeline and confidence in an exit strategy.

First - Who?

The usual suspects include family members, key employees or third party buyers. But your business isn’t ‘usual’. For your business, you need to consider what matters most to you. If you want the business to provide for your family, you have to realistically consider whether the family member(s) has the skills and experience to run the business profitably and sustainably. Are they motivated enough? Can you afford the options on a ‘sale’ to the family member and still fund a retirement lifestyle that meets your personal needs?

If you want the business to benefit your key employee(s), you have to realistically consider whether they have the skills, experience and motivation to run it? You also have to figure out what a ‘sale’ to them will look like and whether you can afford to do it.

Financing your Endless Summer

Most business sale transactions occurring between owners and family or key employees will be financed, in part or whole, by the owner. And, these are the most complex and challenging transactions to work through. Why? Selling your ‘baby’ to family or loyal employees is so emotional. Your deep connection to them is what makes the sale so gratifying and yet for the transition to work for all, it requires you to let go and accept a different leadership model. It’s easier to do that with someone you are not emotionally connected to. Are you prepared to release the reins over time, while financing their strategic direction?

Building Value: your Endless Summer

If a third party buyer is the best option for you, you need to build your strategy now. This is the most time consuming of the three options because you have to find them, negotiate and then sell. Starting now allows you to test interest, seek prospective buyers, and get feedback on the value of your business to a third party. We know it’s valuable to you, but what will someone else pay for it? With that information, you can choose to invest another 2 – 5 years or even 5 – 10 years, to make the timing and valuation of your business sale work for you.

Is it time for Your Endless Summer?

You’ve invested in your business. Now invest in your life. It’s your time.