Over the years working with independent advisory firm owners, I’ve seen what works — and what doesn’t. One area where my experience has been particularly enlightening is succession planning.
Even with the current acquisition frenzy, many firm owners still want to transition their businesses internally, but I’ve seen a number of internal succession plans that haven’t worked. I used to wonder why, so sometime ago I started tracking succession planning behaviors to find the answer.
What I’ve Learned
Traditionally, most firm owners who have decided it’s time to prepare for their retirement go to a “succession planning” firm that outlines a plan based on the owner’s goals and show them what should happen based on the owner’s retirement plans and the growth of the business. This usually is measured by increases in the number of clients, revenues, and profitability.
The problem with these pro formas is they usually create expectations by the retiring owner of what the successor “should” be able to achieve and locks out the successor from taking on realistic initiatives that would be more successful. In doing so, it erodes trust between owner and successor. Consequently, in a majority of the firms I’ve followed, the designated “successor” does not end up taking over the business — and the firms are sold to outside buyers.
The reason for the low success rate for internal succession plans is the singular focus on achieving those “target numbers,” rather than on the current growth environment and grooming the successor to take over the business. Here’s an example of a transition that illustrates the elements of what I’ve found to be the keys to successful successions.
About 15 years ago, I got a call from a male owner advisor who had met a young female advisor who wanted to sell her firm, but continue to work with her clients. The resulting merged firm has been a client for 15 years. The owner has retired and his (previous) firm is now owned by two younger partners, and the successor transfer is completed.
But, the key to the success of this transfer came not from setting goals, but from an almost myopic focus on the relationship between the owner and his successors. That relationship was based on building trust between them and a transfer of knowledge, information, and support from the owner. Most important, there were open and honest communications between the groups.
Communication is the first key to success. Once good lines of communication are established between owner and successor, the owner can begin to transfer what is needed to successfully run the business going forward. Most importantly, though, an owner must give to her/his successor trust and faith — the owner believes the successor can and will gain the knowledge and experience to successfully run the business.
Trust can be conveyed in a number of ways: patience, support, honesty, encouragement, acceptance of weaknesses, and openness and honesty. Also, with a transition, there must be a willingness to transfer power and authority, a clear desire to create a good relationship with the successor, and most importantly, a commitment to the successor.
The owner can’t be exploring other options, and/or entertaining offers to sell to outside buyers. If an owner isn’t committed to the successor, the successor will never be committed to the owner.