Succeeding through succession

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Using succession planning to build value and talent

Canadian private company leaders need to create succession plans that build value and talent for the growth of their business

“From an operational perspective, in order to manage, you have to have some sense of what you’re managing. Future leaders should walk the floor and get to know employees.”

Brooke Valentine
Partner, Consulting & Deals

During PwC’s recent webinar Creating lasting value — Preparing your business for a successful transition, 80% of participants* said their company did not have a well-defined succession plan. Considering that upwards of 80% of Canada’s businesses are family-owned or privately-held and that according to the 2012 Business Insights Survey, about one quarter of those businesses expect a change in ownership within the next five years, the potential fallout has far-reaching repercussions.

“Succession planning among private companies has an impact on the Canadian economy,” says Sharon Duguid, director, PwC’s Centre for Entrepreneurs and Family Enterprise.

“Companies that transition to the next generation or a new management group without a succession plan experience a 29% to 32% drop in business in the first three years after handing over the reins. That loss hurts more than just the individual company.”

This drop reflects the void in leadership and the value of a strong talent pipeline. Part of the problem is that many owner entrepreneurs are building a business without thinking that their prospective buyers are going to be looking for a pipeline of leadership, says Brooke Valentine, partner, Consulting & Deals, PwC. “Having that strong leadership team in place is what will allow the new owner to unlock the value of the business—and buyers know this. They will pay a better price if the company has already developed a succession plan.”

In fact, one of the main components of a successful succession plan is the education and development of new leaders. Perhaps not surprisingly, one of the questions that emerged during the webinar was “how do you develop successors”?

Finding and developing future leaders:

  • Create job descriptions. Set time aside each year to look at the job tasks being done and document it. “Most private company owners are too busy in the day-to-day operations and many times their key staff members have three or four roles. When asked to put a job description together and write it down, they can’t, but they really should,” says Duguid. “That’s what corporations do. For example, a senior manager at a communications company does not make the next tier of leadership if they don’t have three people ready to go in their pipeline with appropriate skills to step into their role. That is a corporate responsibility for many organizations.”
  • Create a growth strategy and identify the skill sets that are necessary to achieve that strategy. Many business owners do this intuitively, but that approach does not sustain a business for long-term significant growth. “Quantify and qualify what the roles are because then you can build a development plan for employees and the business,” says Duguid. “Strategically look forward. What skill sets do you need to grow? This may lead to bringing in consulting support and/or developing people internally.”
  • Identify high potential talent. Create an objective checklist of necessary competencies: leadership capacity, ability to bring innovation to the table, effective communication skills and the level of leadership the company needs, for example. It may be helpful to bring in an outside consultant for a day or two to help create the checklist. Conduct an interview and have candidates vetted by board members and other leadership for compatibility.
  • Provide your future leaders with the right professional development, training and experience. Best practices include job shadowing, mentoring and coaching up-and-coming talent, says Valentine. “Relationships with customers and suppliers form such a critical part of the business. Some of the best training up and coming leaders can receive is by being involved in those relationships. Get them involved in the negotiating of agreements and contracts, prospecting for new customers, handling customer complaints,” he says. “From an operational perspective, in order to manage, you have to have some sense of what you’re managing. Future leaders should walk the floor and get to know employees.”
  • Put together a board of trusted advisors that are not part of the business or family system. Think lawyers, accountants, industry representatives—people who bring professional expertise and objectivity around what the family’s needs are and what is in the best interest of the business. An advisory board has no emotional attachment so can help business owners make that all important decision of who should take over; the next generation or a professional management team. For example, in many cases children who want to carry on the family business, have built the necessary skill sets and have experience working outside the business—five years is a recognized best practice on this front—transition well into leadership. But if owners or family members don’t want to be involved or are not capable of doing so effectively, then that’s the time to bring in a professional management team. An advisory board can help take the emotion out of that potentially charged decision.
  • Come to agreement about the long-term mission and vision of the company. Make sure the next leadership team understands and fosters the mission and vision of the business.

Succession planning is not easy and there are several moving parts, but the benefits are worth it, says Duguid. “The business will be more transparent. People will know their roles and responsibilities and they will be more capable of continuing once the current leadership leaves. Customers and suppliers will have confidence that the business is not going away—and even better, that it’s in good, capable hands. There will be no cultural confusion and no dip in returns.” And that’s good for everyone.

* 54 individuals responded to the polling question

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Let's Talk is part of our PwC Private Business Exchange program — a dynamic, interactive community of private business owners and executives. To read all articles in the Let's Talk series, please follow the links below:

Making time to grow your business
Roadmap to a successful social media strategy
Plan more, Pay less: Effective tax strategies for your family business
Planning the next move: Successfully transitioning to a professionally-managed business
Succeeding through succession: Using succession planning to build value and talent
Growing mobile
Driving growth with your supply chain
Advancing the growth agenda
Making strategic planning real
Connecting With Social Media
A business case for sustainability
A Healthy Family Business
The 21-Year Rule is Taxing on Family Trusts
U.S. Estate Tax Laws: What you need to know
Embracing the Power of the Cloud
Internal Controls
Fighting Fraud
Five Steps to a Greener Business
Freezing Your Estate
Maximize Your Tax Savings
Risk Management
Dealing with Your Banker