1/4/2013 SUCCESSION PLANNING. When is the right time to begin succession? The Entrepreneurial Mindset 1

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1 SUCCESSION PLANNING Cliff Atherton Managing Director GulfStar Group When is the right time to begin succession? succession is not simply a business decision, a financial, or a family decision but a process that must take place over many years, involving family, business, and financial choices and often necessitating a delicate balancing act. 1 It s never too early to start! 1 Bork, Jaffe, Lane, Dashew and Hisler, Working with Family Business The Entrepreneurial Mindset 1 Entrepreneurs passionately seek new opportunities. Entrepreneurs pursue opportunities with enormous discipline. Entrepreneurs pursue only the very best opportunities. Entrepreneurs are disciplined and narrowly focused. Entrepreneurs focus on execution. They don t analyze new ideas to death. Entrepreneurs engage the energies of others, both inside and outside the organization. Entrepreneurs create networks of relationships. 1 Rita Gunter McGrath and Ian MacMillian, The Entrepreneurial Mindset 1

2 What the Mature Entrepreneur Needs Financial security and independence A challenge that matches his/her interests, capabilities and energy level Time to enjoy the fruits of his/her labors A healthy, h uncomplicated relationship with ihhi his/her adult children A sense of fulfillment How do the Founders provide resources to meet the needs of the business today? Strategic Direction Managerial Talent Capital Special Relationships: Customers, Suppliers Tradition, History and Culture Challenge: How to leave all of these key ingredients intact in the firm while the Founders exit. Myths of the Mature Entrepreneur 1 My business is different. When you ve had my experience, you ll understand. Since you haven t, trust me. I m right. Always. It s all my money, and it is my business how I spend it. No one else s. s. It s not so great to own your own business. Business is lousy. I should never have gone into business for myself. This is my business. I built it. I can sell it or close it down. It s all up to me. I didn t do this for myself. I did it all for you and for the children. 1 Leon Danco, Beyond Survival 2

3 The life cycle of the firm never matches the life cycle of the Founders $$ $$ How do I know when it s time to do something? Your personal situation, health and goals The firm s situation, health and objectives Industry conditions Family relationships and conflicts will tell you when it s time. The Knowing Doing Gap 1 Consultant/Recommendations from 4 previous studies of succession Why do you want to pay for the same answer a fifth time? the challenge of turning knowledge about how to enhance organizational performance into actions consistent with that knowledge. the tendency to treat talking about something as the equivalent of doing something. 1 Jeffrey Pfeffer and Robert T. Sutton, The Knowing Doing Gap 3

4 Overlapping Systems Owners (Control) Managers Employees / Employees (CEO) Value / Value Liquidity / Differentiated Systems Control Owners Owners (Control) Board of Directors Management Business Value Value / / Liquidity Liquidity Leadership Transfer Execution of Strategy Coaching the Team Public Face of the Company Management 4

5 Control Strategy Senior Management / Feedback from Advisory Boards Who is on the Board of Directors? Peers who have made or are making transition Owners (Control) Creating an Effective Board Board is a part of the control group Strategy development Next generation is getting mentoring from the board Owners (Control) Feedback Value / Liquidity Founder needs financial independence from the firm needs to retain cash flow for growth How to resolve need to provide value & liquidity to founders Value / Liquidity 5

6 Ownership Versus Control Chairman of the Board vs. CEO Passive Owner vs. Active Owner Source of Wealth vs. Source of Personal Identity Need to Enjoy Accomplishments vs. Need to Accomplish and Achieve Different generations see the world differently Baby Boomers ( ) Work centric Independent challenge establishment Goal oriented Competitive Work & Position = Self worth Gen X (1965 mid 80 s) Individualistic Technologically Adept shift from manufacturing to service Flexible Value work life balance Gen Y / Millennials (mid 80 s beyond) Tech savvy Family centric Achievement oriented Team oriented Attention craving Differentiation of the Founder group and the firm: The Right Way Clearly Defined Boundaries Time The business will not survive the Founders unless it becomes fully differentiated from them. Differentiation is a long, difficult process. 6

7 Differentiation of the Founder group and the firm: The Wrong Way Disagreement over Founder business Group Conflict Time Succession the wrong way can cause the firm to disintegrate or fragment Mature, Founder led firms focus less on strategy and more on operational effectiveness Successful Entrepreneurs understand strategy (vision, positioning, exploitable opportunity.) Opportunity led them to create the firm. They know how to execute with limited resources (activities, operational effectiveness, best practices.) They know how to lead. Why succession planning is more difficult for advisory firms? All assets are personal relationships Initially those relationships are with the founders Most founders want to be relationship managers, not administrators/people managers Relationship basis of the firm customers are its primary assets makes it difficult to separate the founder from the firm 7

8 Adding a layer of professional management to help the firm grow and survive is always a challenge Founder has difficulty delegating key responsibilities Inability to delegate limits the growth and value of the firm Successful succession really starts early and it starts when you begin to professionalize your management team 8