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Succession Planning – a Challenge for Every Business Owner

Possibilities – Advantages and Disadvantages

When Apple CEO, Steve Jobs, resigned from his position due to illness, the company’s stock plummeted by more than five percent within just a few hours. And that, in spite of the fact that Jobs had in January already transferred the daily business to his successor, and that he would remain with the company as Chairmen of the Board of Directors. This reaction by investors clearly indicates what an important role the choice of successor plays, regardless of whether it is a tradition-rich family enterprise or a globally operating corporation.

According to the “Bundesministerium für Wirtschaft and Technologie” (BMWi) [German Federal Ministry for Economics and Technology], most succession processes for executive personnel are initiated upon reaching a certain age and according to a plan, but in one fourth of the cases, on the other hand, due to an unforeseeable event. In most of these cases, the predecessor has suddenly taken ill or passed away, but another common reason is that the economic situation makes it necessary to quickly pass control to a successor. Whether expected or unexpected, the choice of successor and the period immediately following transfer of control are decisive factors for the future of the company. If the transfer was not able to be carefully planned long beforehand and implemented step-by-step, problems can arise that can even threaten the financial existence of the company. When the decision-maker suddenly leaves, initially a leaderless phase ensues, during which a successor must be appointed and introduced into office under extreme pressure of time in order to keep the daily business running. An extensive breaking in period is not possible in such cases, and the predecessor’s valuable company-specific knowledge and important contacts are lost irrevocably from one day to the next.

In Family Hand – But Always in Good Hands?

Even in the case of a planned - usually age-related - transfer of responsibility, there are still often problems, such as financing mistakes, wrong tax decisions, misjudging legal issues and underestimating the psychological components. In plain language, this means the successor has not been properly prepared for the new position. Whether family member, internal employee or external buyer - thoroughly assessing a company is a huge challenge, and the actual daily business can deviate significantly from what the successor imagined.

Family members who “inherit” from their predecessor have in most cases gained years of experience in the business, and have been prepared step-by-step for succession. But such successions also have great potential for conflicts when the predecessor finds it difficult to withdraw from the company, or does not agree with the new style of leadership. Particularly between parents and their children, tension can result when the older generation criticizes the younger or views its life’s work as threatened by a new concept. Here both sides must exhibit a great deal of understanding and readiness for compromise, and continuously remind themselves that both are pursuing the same goal, i.e., ensuring the continued existence of the company.

External Takeover - Change of Course Inevitable

If no family member is in a position or willing to take over leadership of the company, it often comes to a so-called management buy-out, where one or more employees of the company assume succession. A takeover by internal employees of the company has good prospects for success, in that they already know the company and may even have already been involved in leadership decisions. The reaction of the rest of the workforce should also not be underestimated, in that it is often easier for them to accept an “internal” as new leader rather than an “external,” whom they may initially view skeptically and from whom they may be fearing (often rightly so) a radical change of strategy, such as job cutbacks.

External successors are often competitors, or also industry professionals who prefer an already established company over founding a new company. In both cases, the successors can build on the existing company, but conflicts are inevitable due to the lack of knowledge of the company’s internal processes, and a change of course is often unavoidable. When seen from the positive side, however, this can also mean a breath of fresh air for the company and an enormous potential for improvement, particularly when succession became necessary due to an economically difficult situation.

Ideally, Succession Should Be Planned Long Beforehand

Regardless of where the successor comes from, it must be decided for every planned transition whether the transfer should be done in one step or gradually step-by-step. A step-by-step transfer has the advantage that the successor will be optimally prepared and the transition phase will go through with as few problems as possible. The BMWi recommends a period of about five years for this preparation. This “dual leadership” is especially advantageous when the successor was previously not familiar with the company’s daily business. But on the other hand, particularly this situation can lead to conflicts when there are differences of opinion between them as to how to proceed.

If the company is in financial difficulties or is taken over by an external owner, an exact date is often stipulated for the predecessor’s stepping down because grave changes are often on the agenda, which the predecessor may find very difficult to accept. If worse comes to worse, he/she may even attempt to undermine the successor’s authority within the company through open or even covert criticism, which would detrimentally affect the general work atmosphere and success of the company.

The question of succession in an enterprise is viewed rightly today as a very important matter. Banks are now even requiring detailed information on how succession is regulated in the company before granting a loan, and they often make the conditions of the loan dependent upon just how this is to be done. And business owners are also all the more careful in times of financial crisis to pass their life’s work not just into good hands, but into the best hands.

Source: BMWi Guideline “Unternehmensnachfolge – Die optimale Planung” [Succession in Enterprises – Optimal Planning] - German Version

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