How do you ensure a succession plan works? When should you start considering succession planning? Penny de Valk, Equiteq specialist in leadership development and human capital, addressed these and other front-of-mind questions of business owners in the Q&A of our recent succession webinar.
The main issues raised included:
- Recruiting new leaders: internal versus external
- Sharing equity to attract and engage
- Handling founders’ syndrome and the exit transition
What do you see as the pros and cons of appointing a CEO from within the firm compared with recruiting from outside?
There’s no right or wrong here. With an internal candidate you get someone who is steeped in the values and the market, someone who really understands the organization. That can have huge advantages, but if you are looking for exponential growth, or a shift in thinking, it may be best to recruit externally. It is important to begin with what you need, really spend time on ‘what good looks like’ then assess your existing people against this. You can spot the potential inside and develop it. You find people from within the business who are just as ambitious and are just as visionary about what the organization could be, not just what the organization was.
The rule of thumb would be: for organizations that are not in true start-up mode, but are half way through their maturity, it is probably half and half. The important thing is there is a good mix of capability, experience and potential.
Can the onboarding process for new leadership create a clash with senior appointments who are keen to introduce new changes straight away?
That is why the first three to six months are so critical, you want someone to step in and make a difference as soon as they can. Asking questions such as: what is performance going to look like in the first three months? And making sure the parameters around performance are clearly identified.
We expect new leaders to be able to step in directly, but none of us are the finished product. You want someone who is coming into the business or role to be even better at their job in 18 months’ time. There are definitely high expectations around their performance: a nuanced person who also has the emotional maturity to take the founder on that journey for the first three months, and who can step into their leadership identity with real confidence knowing that the board supports them.
Can you can expand on the options around sharing equity?
With share options, let’s first take a UK-only company that remains a UK company and has no overseas operations whatsoever. Options are awarded to an employee or manager and they don’t pay the price. Rather, the option is a right to subscribe for shares in the future, normally on an exit, at a set price. If the value of the business goes up there is profit in the options and they’ll exercise it.
Where you have overseas operations, the options work badly for managers. Ideally you want an incentive scheme with the same mechanism for all the people within the business.
When options don’t work for overseas shareholders, you have to start looking at shares. No one wants to give away shares with real value on day one, but rather wants to create an incentive around the increase in value over time. This can be done through hurdle shares.
The easiest way to make shares work so they only pay out for the increase in value, is to raise some external finance from private equity or a bank. For the founder to take value out of the company, to sell shares in the company, they have some kind of share buy-back deal.
Broadly speaking, options can work very well for a UK-only business for UK taxpayers. Hurdle shares can also make sense, especially when combined with founders taking some value off the table.
Succession is quite an emotional issue and you discussed dependency on founders. Can you tell us what you mean by founders’ syndrome? What are the signs that there is too much dependency in a firm on a founder?
Investors will want to de risk over dependence on a founder but will also want the value they bring to be sustained for as long as possible. There are founders who are iconic in the organization, with mythical value so the loss of them in the organization feels huge. Very often the founder is conflicted about handing off in the new ownership regime. Which goes back to having a real understanding of what success means to them. Founders can be very emotionally engaged in the company and its future. It is not surprising that 40% end up in a role within the organization.
We see founders’ syndrome in two stark ways. Firstly, the founder who never quite gives up his or her role, and continues to be so influential or even meddling that the CEO cannot do their job in their own way.
Then here is the opposite situation where a founder tries to make themselves too scarce too quickly, believing they should leave space for the CEO to make his mark. That isn’t necessarily smart for the business and in reality the new CEO would benefit from the founder’s input.
Succession is a process not an event. Start it as soon as you are thinking about an exit. It will not only help with the transition but investors will want to see how well managed the business is and in the future.
If you are preparing to sell your consulting firm and would like to discuss your plans, please get in touch.
Are you a member of Equiteq Edge? It’s full of content to help consulting firm owners prepare for sale and sell their business. Register here to gain full access.