No. 5: Owners + Leaders

Many of the books I read in the Succession Planning genre on Amazon and other distribution sites are written to help businesses address leadership succession. Who will replace your current CEO? Or your CFO? Who will lead your organization into the future? The focus is about finding the best people to work in the business as key employees.  

Small business succession planning, certainly as applies to Professional Services, has at least one key difference. The next generation leaders are almost always investors as well. The leaders are also owners. It is not enough to have the skills of a CEO in a small business (though it is certainly helpful), you also have to be willing to take on the risk of buying stock in a closely held business, and, one day, reselling that equity to a short-list of next generation buyers who work for you. I think that is the working definition of a “key difference”.  

In addition, most Successor Teams (G2s and G3s) are comprised of multiple owners/leaders because of the cost of the buy-in and because of the long time horizon over which a typical Succession Plan unfolds. As a founder, or G1, you cannot afford to bet on just one individual to acquire all of the equity on an after-tax basis and commit to a 20 to 30-year career length investment. It takes a team. As hard as it might be to replace a CEO at a Fortune 500 company, I’d wager that it is ever harder to find a group of collaborative next generation, professional service providers who are willing and able to be minority owners on a Successor Team and stay the course for two or three decades. That is the heavy lifting that separates investors from employees.

For all these reasons, founding and current owners of a Professional Services Business need to start the planning process much earlier than the leaders of a larger, sometimes publicly traded company. Assembling a complete Successor Team is usually accomplished one person at a time, but the initial G2s should probably make their first investment when the founding owner or ownership group (on average) is in their early 50s – best case scenario.

This means that your practice needs to begin its transformation into an equity-centric business sooner than that (see Lesson No. 3, Building With the End in Mind)…at least two to three years earlier so that a due diligence review by prospective next generation investors can see at least a glimmer of hope for the future based on some recent successes! Keep in mind that through the various Lessons in this first book, it is perfectly OK to enlist the next generation investors’ help in building out a stronger business model, and to help support growth and efficiency – that will make for a better team and a more valuable business. G1, you don’t have to do it all or do it alone; you just have to get the process started and open the front door to the next generation prospects.  

This blog post isn’t about when to start your Succession Planning; rather, it is about acknowledging how much more challenging it is to perpetuate a small, privately owned business from one generation to the next. This is not for the faint of heart! It is hard work. But if you’ve already started a business and made it this far, you’re obviously not afraid of hard work, so why not make the work investment of creating a legacy, or at least a second generation of owners? Why not build something that can serve your current clients’ children and grandchildren? Why not give your key employees, maybe even a son and/or daughter, the opportunity to invest in what you’ve started and carry it on, and make it better?

You’ll never know the answers unless you try.

Thanks for reading,

David Sr.