How to Build a Bulletproof Succession Plan for Your Family Business

Speaker A: In this episode, we're going to talk all about succession, and we're going to talk about it from a variety of angles. We're going to talk about from the angle of, uh, if you want to pass it on to the next generation within the business, or if you want to sell the business and transfer it to another entity completely and everything in between. Strengthen the love, the legacy and the lifestyle in your family business. This is fearless. Family business. So whether you're in generation one or you're in generation four, five, six or seven in your business, whether you've been in business for a year or you've been in business for a hundred years, succession planning is a vital part of your business strategy and your exit strategy. And that's why it's critical to think about why, even if you're not planning on leaving the business, I mean, what if you get hit by a bus tomorrow? What if you get run over in the street by a bus? I don't know why we keep talking about getting run over by buses in our lives to demonstrate why we should do things now, but that's the analogy we go with. Um, but anyway, if you did get hit by a bus tomorrow, who's going to take over for you? Who's it going to be passed on to? And that's why I want to talk about some of the simple steps that we can, you can take in order to make sure that you have a bulletproof succession plan and that you're ready to transition the business on your terms and not somebody else's. Now, I'm going to preface this by saying I'm not going to get into the legal structures like the estate, uh, planning or the financial planning that that needs to take place. I am not an attorney. I am not a financial advisor. Those are best accomplished by talking to your attorneys and actually bringing in a team of people to talk about this exit strategy. You'll need an estate planner. You'll likely need a financial planner if your business is big enough. And, uh, and, and you'll need to set up those estates, those trusts in the way that your attorney advises. But I would just suggest that you get that advice from your attorney. What I am speaking about here though, is really the stuff you have to do in the business to make sure that you have a transferable entity and to make sure that, uh, that you're setting up the next generation or the next leaders up for success. That does a variety of things for you. It not only helps that you're going to smooth out that transition to the next generation or the next, next set of owners. But it also helps you to transition at the, at the highest value and uh, and, and make it attractive to the people that you're giving it to or you're selling it to. That's the real goal within all of this. So I'm going to take that step by step and I want to start, um, I want to take this within looking at two frames and I want to acknowledge too, that these two frames can overlap, that you can have some variation of both. But really what we're talking about when we talk about succession planning is we're going to, we're talking about either leadership succession, where you're transitioning from one set of leadership within the business to another. And that can take a variety of forms. It could be senior leadership at the CEO level, the leadership team level, or any individual layers in that business. And a lot of those are handled the same in similar ways. And then there's the succession of ownership, how you transition the ownership of the business within your organization. And again, that's where bringing attorneys in, bringing financial advisors in could play a key role in, in that part. But I want to talk about those two things and how to navigate those things separately because they overlap. But they're also, you know, you want to manage them a little bit differently. And the first one we'll talk about is leadership succession. And the, and, and I really want to break this down into five steps, five key steps that you want to take to really put together, ah, a really solid and bulletproof succession plan within your business for key leadership roles. So the first thing that you want to do and the first thing that you want to think of when you're thinking about succession planning is you want to make sure right now that you have the right people in the right seats. Even before you put a plan together on the succession plan, start focusing on putting the right people in the right seats. And this could be accomplished through a tool that's called the accountability chart through eos. Uh, you start with structure first. And what that means is that you want to lay out within your organization what the right functions are that you need right now. Uh, and the goal here really is you want to take yourself, your leadership team, everybody out of the organization, fire everybody. Figuratively, of course. Don't do that literally you don't want to, but you don't want to do that literally. Uh, I'm talking about figuratively here. Figuratively fire everybody from your organization. And then take a look at your organization from a blank slate as you're operating right now, or as you would like to operate six months from now or a year from now, what is the right structure for your organization? What functions do you need in your organization to make it so that it operates effectively, not so that Uncle Bill can have a job? You're not thinking about people right now. What you're thinking about is the right functions. And be super honest about this, because this is important. And this also goes into how you're, how you're creating value in your organization. Um, because if you have all of the right people in the right seats, you're actually creating an organization that is ultimately starting to build a foundation for a great culture, that has a great team that people want to be a part of. And that's really important because when you're able to build that foundational structure of right seats, seats that people want to fill, you're going to attract the right people to the organization. And those people that you're attracting may just be the next you, the next version of you in the organization, somebody that will succeed you. And uh, people that are, are, um, uh, people that really want to, you know, are ambitious and, and, and, and are really talented will be attracted to organizations that really take the time to incorporate the right structure first. Before you could get the right people on the bus, you have to make seats for them. You have to make the right seats for them. And so really figure out what your organization needs. So how do you, how do you do that? Well, you start with the leadership seat, the leadership team, the senior leadership team. Really, what are the major functions in your organization that you need? Every organization on the planet is going to need a sales and marketing function. Sometimes they could be separate, sometimes they could be the same. But you're going to need to sell your product, you're going to need to market it. So you need a sales and marketing function. You need an operations function, something that some, A, uh, um, a part of the business that builds the product or delivers on the service, some combination of both. But that operations function is an important function. And finally, you need a finance function. The finance function is what controls the cash coming in and out of the business, that manages the financial controls, that gives you all the reports that you need, that tells you whether you're making money or losing money. Those three functions, marketing, sales, operations and finance, are the key functions in your organization that you need to start with at the leadership team level. From there, you can build it out. You can actually have, um, more, um, people on that leadership team somewhere between Three of seven is, is a good number to have, but you, you want to make sure that those are aligned, those seats are aligned with your organization. And then making sure that on top of that, on top of that team that you have the CEO, which in EOS terms would be the integrator or the visionary and, or some combination of that too. You have the CEO or some C suite executives that are, that are running the business as the visionary and the integrator that are holding that team accountable uh, to getting the results. And when you have that leadership team established, what you then want to do is you want to just outline the roles, the specific five to seven roles that each of those functions serve, that ultimately they're going to be accountable. The results that you want to see, you know, focus on the outcome within those, within those roles. If you have a marketing and sales, uh, uh, seat at that leadership team level, which, which you should, uh, you'll, you're going to have a series of roles there. You'll. And, and likely those roles are going to be um, you know, generating leads, selling the product, uh, you know, providing uh, the technical support. Whatever the roles are of that, make sure that they're outlined. They're the most important things that, that, that, that seat is going to be held accountable for. Then once you have all of the leadership team, then you could break down each of the individual teams. What functions do you need underneath marketing and sales, underneath operations, underneath finance? Um, and make sure that you outline the roles for those seats as well. What that's going to do is it's going to create that foundational structure. Um, because if you don't have that foundational structure and you're just kind of putting people in seats randomly, well, you're going to have a flimsy organization. And a flimsy organization is really, really challenging. It's really difficult to transition, um, because ultimately you'll have somebody who's going to take over this house of cards that you've just been juggling for so long or balancing and making sure it stays together. They may there and, and they may not know necessarily how you're balancing it. That's when it falls apart. That's when generational transitions don't go. Well. If you do have the right structure, however, uh, then it's a lot easier to transition that because the business is still going to be operating somewhat seamlessly during the, during that transition. The second step in, in, in that part of getting the right people in the right seats is making sure that you're getting the People, the right people in there. And this is making sure that you're getting the, the people that really, that really consistently exhibit your core values. They are living out your core values. They get the, they get the role, they want the role. They have the capacity to do it. And if you have people that are just the right people in the right seats, well, then a couple of things are going to happen. You're going to have a, um, you're going to have a seamless company that can operate with or without you now that you are starting to put the right people in the right seats, so the transition will be smoother. And secondly, you're going to have a great pool of talent to be able to find that next leader in, in. So you can create that leadership succession plan. That's really what you want to get to. So if you don't know who your next leader could be, I mean, uh, and if you're, if you're seeing that in your organization, you can identify a leader, well, then you have to ask yourself the question, do I have the right people in the right seats? If I can't identify leadership from within the ranks, probably not. Then the second, uh, part, uh, of leadership succession, the, the second step would be to start identifying those future leaders early. You know, really look for the qualities that you would want in leadership. And these are going to be people that are really taking initiative. They are coming up with great ideas and they are, they are really pushing forward with, with, with great initiatives. And uh, and they're living out your core values. Not just living them out, but they're setting the example for them. And the reason you want to look for that is because obviously that's what they're going to be doing in a leadership position. They're going to be modeling that. They're going to be, they're going to be putting into effect those, those, those initiatives, uh, they're going to be leading from that space. So just, you know, take note and, and really look at, in the organization, if you're looking from within, identify who those future leaders are. And so if you're running a family business and a lot and, and you have that right structure, the right people in the right seats, chances are you're going to be able to find those, uh, those next leaders in, within the, um, uh, within the ranks and you'll be able to find them there. And that's really important. You want to look for things like humility and curiosity. You don't want people who are, uh, who are just going to jump in Dive in and solve the problem themselves necessarily. Um, and that maybe sound counterintuitive, but when you're looking at leadership, uh, you know, senior leadership, people who are strategic and decision makers, you want people who are effective at delegating and helping other people to succeed help coaching others. You don't necessarily want people that are going to dive in and do everything. That's not really the type of work ethic that's going to be, uh, about a leader. Because if they're going to do everything and they're not going to, they're not going to delegate anything, well then they're not using their time as wisely as they should. Um, so they need to be able to lead their peers. And that includes modeling core values, um, being able to delegate effectively, um, not just those that really know the business like the back of their hand. You want to make sure that um, they're doing that effectively. Um, and uh, and so really that's just identifying those people from within who might have that special talent for taking over at some point. Then the third step in terms of developing leadership from, from within, for succession would be to create a leadership development pipeline or strategy. And this includes really just making sure that from within you're giving the coaching, you're providing the opportunity for mentorship, you're lifting people up. I've seen it time and time again in family business where I see a next gen potential leader who can step up and maybe be a next gen leader. But the previous, the generation that's in charge right now is, is basically saying to them, just wait your turn, don't be so ambitious, don't be so antsy, you'll get your chance. And I can't tell you how demoralizing that is to hear that when you're also simultaneously being told, you know, we have uh, uh, that, that someday in the future you might take on a leadership role. But they're not getting the skills or the training to actually become a leader. They're not getting exposed to that level of experience. Then that doesn't mean that they have to follow you around or follow the leader, the uh, CEO around and see what they're doing. But they do have to be exposed to that level of mentorship from within and outside. And outside is an incredible resource to make sure that you're developing those leadership skills. And this is again where that humility comes into play where you can ask for help from the outside. Because a lot of times when you're just getting the mentorship from within, you're staying within that bubble of your family business, you're not getting exposed to other ideas or innovation that can happen from outside. So being able to allow that next generation, that leadership development, that next generation of leadership to be involved in, maybe outside masterminds or groups or cohorts that can provide some level of mentorship and peer support that will help them to navigate some of the difficulty or uh, the challenges that they're facing now and learn about how to be better leaders. There's a lot of different programs out there, but I would really advise that you don't just focus on spending money, uh, on a weekly seminar. The weekly seminar will stick into their minds for about another week. Um, you, you'll, you'll tend to retain the information that you learned for about as long as you've been learning it. And, and that's just the way it goes. But when you involve them in an actual community that is part of a support group that, that it lasts, that meets regularly, that provides that mentorship and that peer support, well then they're going to develop those skills, they're going to develop the confidence and they're going to have that support system that can help them as they grow into that leadership role. That's what great leadership development looks like. And there's some great programs out there to help with that. Vistage is a good one for, you know, C suite executives or next gen leaders. Um, there's also family business councils all over the country that are associated with academia that can uh, offer those kind of peer support groups. Um, I'm part of a group called GoBundance which has helped me to have that, have that success. There's entrepreneurs organization, there's industry specific forums, there's all sorts of those. But look for those groups that can provide those outside support and that's a big deal. Leadership isn't just taught, it's really cultivated through community experience and feedback. That's how you build that community. The fourth step in terms of really creating that succession plan is to document your vision, document your values and document the key relationships and document the processes. This is all stuff that you can start to build out within your uh, with, with, with simple strategies. In eos, we have a Vision Traction organizer which helps to really cement the, that vision and to get everybody aligned around it. And when you start to uh, when you start to speak the language of that, of that vision, of those values and those key relationships, well then you, then you really start to embed that within the next generation who may come up and lead, who may be in that succession plan and then being able to document what that succession plan looks like and what the key processes look like, that makes for a more seamless transition as you get to that point where the next generation is going to start to take over. So uh, ultimately just allowing that next gen to you know, be a part of that documentation process and uh, and, and to learn about, you know, what that succession is, be open and honest about this as you start to develop that plan. Um, and these are just the simple core processes in your business that, that should be learned at a very high level. You know, at a very high level every organization has somewhere between 6 and 10 truly core processes. Not talking about standard operating procedures here that happen at the tactical level. I'm talking about the, the real meat and potatoes of how this business runs. And uh, and so helping them to understand that at a, at a, at a very, um, high level is going to help them to transition more smoothly. It's also going to allow, if everybody else in the organization follows those, those key processes, those core processes, well then you're going to be able to have a seamless transition uh, as well because the new leader is not going to be embroiled in the day to day. You want to hand off that transition, that next gen transition to the CEO, CEO so that they're able to see things at a high level. And then of course, step five, after, uh, you've documented it all, you got to define that transition timeline and build in the accountability. This means that you want to set a timeline and you want to stick to it. Another mistake that a lot of families and family businesses make is you'll have a leader who says that they're going to retire in five years and then five years comes along and they're just not ready for it and so they extend the timeline. What happens there? Well now you have an organization that expects a transition and doesn't get it. And while you might think that that's a contin, a uh, continuity of leadership, what's really happening there is you're having a compromise of trust. You're saying one thing and doing another. And as much as your team or your employees may love you and you're doing such good for them, when you tell them one thing and you do another, it's going to disrupt the trust not just in you, but in the next generation. Because what you're telling the organization when you refuse to stick to your timeline is that the next generation is not ready. So that notoriously they have to overcome that, that dialogue in their own minds. And when they, when the next generation does take over, both the organization and the next generation has that lingering doubt in their minds because you implicitly told them by your inaction that they weren't ready. And uh, and, and so that's where the accountability piece comes in. As you develop that timeline, as you create that timeline and you stick to it, develop the milestones in there so that you're delegating all of those, all of those pieces of that role and that they're able to take it over. And uh, and that way, when you, when the time comes that they can, that, that that day comes that they are the new you, so to speak, um, well, everything runs smoothly because it's already pretty much been operating that way for that long. So now over those few years that you're actually transitioning that process, this leads us into the sixth bonus step here. And this is a really important one. This is a, this is a really important one because as you're delegating out those, uh, those tasks, those things that you have been doing on the path to transition, one thing that you need to also focus on is what are you going to do as the person who's transitioning out? What's next for you? A lot of times, um, you know that the, the, the person who's leaving the company may think that they want to play golf or may, they may think that they want to just retire to an island and drink margaritas. And that may sound great for a week, but what you really want, you don't really want to retire in that instance. You just want a vacation. Because let me tell you, you cannot go from running at 60 miles an hour every single week, working 40 hours a week to boom, nothing for the rest of your life. If you don't have a plan for yourself for transition, a personal plan that, uh, uh, that, that you're going to rely on post exit, well, then you're bound to get bored. And a lot of times that's the reason that, that the leaders stay in their positions longer because they can't contemplate what they're going to do next. So even before you start. And Ed Hart, uh, who was on our podcast, uh, in, in an earlier episode, uh, mentioned this when he talked about that transition. Find the thing that you love to do where you can still be of service, where you can give back and start doing that well before you start to leave, uh, that position so that as you hand off different roles and in your organization, you can start to move into that and make that Transition seamless for yourself as well. And that's really the idea of succession in leadership. Uh, how to create a succession plan in your, in your leadership. But what about if you want to transition ownership and you want to create that ownership transition plan? Well, there's a variety of ways to do this and I don't want to get into all them because there's about an infinite number of ways that you can transition your business and likely none of them are wrong if they're aligned with your vision and what you want. Um, but I will tell you that the important thing about ownership transition or transitioning a company into a new set of ownership, whether it be the next generation or a new company, some combination of both, you will give yourself infinitely more options if you create inherent value in your business. And so uh, so whether you're going to do an esop where you're, where you're going to sell the company to your employees, whether you're going to just straight line transition it down to your kids and gift it to your kids, whether you're going to sell it to your kids, whether you're going to sell it to private equity, whatever it is, you're going to give yourself more options and a more a, uh, smoother transition. If you create a company that has inherent value. And I'm not just talking about financial value. Financial value is just one piece of the puzzle. And if I'm being honest, it only accounts for 20% of the value of a transferable business. Yes, that's right. Your financial value, your ebitda, your, your bottom line profitability, no matter how profitable you are as a business, uh, is only 20% of the value equation of your business when you want to transition it. And because the reality is, uh, is that if you uh, if the business relies solely on you, if that, if, if everything we just talked about with regard to leadership succession, if you haven't put that in place and the business still depends solely on the owner or solely on one person to be sustainable, well then you don't just have a succession problem, you have a value problem. Because the second that you leave, your business doesn't have any value. And that's true of many businesses that don't plan for succession or transition. That's why these two things go hand in hand. That's why the leadership transition and the ownership transition go hand in hand. Because if you do the leadership, uh, succession, uh, strategy effectively and you're creating value in your business, while you are um, inherent value in your business, then you are, you are Creating a transferable company that creates a smoother transition whether you sell it or you're transitioned it to the next generation. So I mentioned that the financial value of the business is only 20% of the equation. Um, and the reason I say that is because you might be in an industry where you, where you can transfer your business or sell your business uh, at anything between say 2x of, of a multiple of 2x of your, of your earnings or maybe it's 7x of your earnings at the high end at the world class level of that business. That's a huge difference. So that, that additional um, 5x in, in, in, in in value can account to millions and millions of dollars. And so here's where, here's where eos and these systems like it really earn uh, their return on investment. Because when you actually start focusing on right people, right seats and getting the right people in there, what you're doing is you're building what's called the human capital, which is another part of capital we talked about financial capital. If you're successful with the financial capital on the earnings front, that doesn't necessarily make you a strong or a valuable business. It only accounts for 20% of that value. Another, another uh, capital is the human capital. That's where you get the right people in the right seats. That's where you attract top talent. That's where you have a great succession plan in place so that you can replace key leaders with new leaders seamlessly. That's ah, that's the human capital piece. And then the next capital is the structural capital. This is making sure that you have the right seats in the organization. Making sure that uh, uh, that, that you're functioning effectively, that you have the structure within the organization so that, that you can you know, function uh, effectively. You know, it includes things like the core processes to make sure that you are, are operating and doing things the right way and the best way every single time and living up to your, your core competency. Um, then the third capital is called customer capital. This is where you are making sure that you are able to serve your companies in a unique way. That you're not dependent on a uh, on, on just a sole source of revenue from one customer or ah, a handful of customers, that you have a diverse array of customer base that uh, that buys from you, that you have a strong core process IP meaning or that you have a strong customer journey. Uh, that is intellectual property for you. Meaning that the reason that the customers come to you is because they know that from start to finish that they can get dependable service that they can't get anywhere else. That's incredible IP that a lot of companies ignore. So make sure that your customer journey is solid and sound and you're actually building in that customer capital that's so valuable to that. It's your marketing strategy. It's making sure that you are entrenching in your marketing strategy the things that make you unique so that they tell a story that ah, that resonates with the customers, that makes the customer feel like they can't do without you, that they can't do business without you or they can't get it what it is without you. So that's the customer capital piece then the final capital, uh, the fifth capital is social capital. And this is what the reputation you have with your communities. It's uh, it's, it's how your culture shows up in the communities and it's frankly how well the company operates without you. Um, and it's great to have a face for the organization, right? Uh, somebody who speaks for the organization that's, and that's typically the visionary or the integrator or which is the CEO of the organization. But if that face of the organization becomes the uh, heart and soul of the organization, meaning the company can't survive without them, well that becomes a problem with value. And so it's balancing that line of making sure that as you're developing leaders, that everybody in the organization matching your core values, that everybody becomes the face for that organization, that when you bring people into the organization that they become a face for that organization. That's how you build a reputation, that's how you build social capital. And when you can strengthen that social capital along with customer capital and structural capital and human capital, well, what you're going to find is that your financial capital is also going to grow because you're running so seamlessly that you're actually growing that financial capital as well, which is only going to strengthen your value even more. And that those four other intangible capitals, the social, the structural, the customer and the human capitals, uh, account for 80% of the value that people are often willing to pay for your, for your company on a sale. So if you think about selling to a strategic buyer who may want to scale, they're going to want to buy a business at ah, that is easily rolled up into their company or that is easily easy to scale for themselves. And uh, and if it's, and if it's that strategic buyer, they're often willing to pay a much higher multiple for that. And that could mean millions in terms of the sale or the succession strategy that you have. So from the standpoint of that, um, even if you don't want to sell, the next generation is going to want to take over a valuable organization. They're going to want to take over something that has all of that intangible value in place. Um, because if, if they're the right leader because they're going to want to be aligned with it, they're not going to want to take over a, a dumpster fire. Um, so you want to make sure that, that, that those uh, that those, that those intangible capitals are strong and uh, and that they're supporting a strong financial capital. That's what's going to make you inherently valuable. And that's really how you focus on ownership succession. Regardless of the path you want to take. If you can give yourself options in how you want to transfer ownership over time, instead of thinking we're never going to sell it, so it doesn't matter, that's terrible thinking. Think about how you can create value in now so you can create options for yourself, even if the plan is to transition it to the next generation. So in uh, in summary, really that's uh, uh, that's really how to build a bulletproof succession plan within your organization. You want to focus on the ownership succession. You want to focus on uh, on the leadership succession. In leadership succession, you want to get all the right people in the right seats. You want to identify those future leaders early. You want to give them a plan, a path to leadership development through outside mentorship and cohort. You want to um, and then, and you want to document the process. You want to, and, and you want to make sure that it's clear and aligned that you have those values and that vision documented. You want to make sure that you have that timeline and that you stick to it. And um, and that you have accountability and milestones in place to make sure that you're delegating those responsibilities as you go. And then um, of course you want to plan for yourself, for your own exit. And in the process of doing that, if you're focusing on building up those four intangible capitals, the human capital, the social capital, the structural capital, the customer capital, you're going to support a strong financial capital and you're going to make your business incredibly transferable, incredibly sellable to a strategic buyer, or to give it away to the next generation, however you want to do that, it's going to give you options. So I hope you enjoyed this episode. I hope it gave you some insight and some food for thought. And if you like this episode, please, please share it with a friend. Please send it to someone who needs to create a succession plan. Please send it to the company that has a dumpster fire right now. I would love to talk to them and help them to build a better business and build a, um. And build more value for themselves and their family. You can't go wrong with that. Hope you enjoyed this episode. Thanks for joining me today. We'll see you next time.