The Exit Engine Podcast Episode 19: The myths and realities of succession planning

Welcome to the ExitEngine Podcast, episode 20. Good morning, John.

Joe, good morning to you.

How are you, man?

I am doing very well today.

Have you ever seen the, uh, the TV show Succession on HBO? I think, I think it's ended now, but it was on for a few years there.

I've seen a few episodes. I can't say that I watched it, watched all of it.

But you know the gist of it, right? Okay, so it's about, it's about this family named the Roys, right? The Roy family. And it's like the father is the, you know, is the, uh, um, the ruthless patriarch, right? And he's got 4 grown kids and they're all kind of vying for control of the company and the whole thing, understanding that the father is going to die. And so it's all about the succession that comes from this big giant kind of media company that these people own, right? And so it was—

Yeah, and I don't want to say it was based— it was based on a famous family potentially from, from Down Under, I believe.

That, that's right. I think it was actually supposed to be a little bit like the, the Murdochs, right?

Yes.

Yeah. So anyway, I don't know how true it was or whatever, but any case Um, if anybody's ever seen that, uh, show, then this is a good time to talk about how much BS that show was, right? So, so we're gonna talk a little bit about Succession, the TV show, and we're gonna compare it to succession planning the way it should be done, right, in, in real life. So just a couple of things that are kind of just off the bat that we should just get—

I love it. I like it. I like it.

The Succession The TV show versus succession planning. Okay, so the first, the first area of con— the first area of, uh, of, uh, of, uh, comparison here is the focus on continuity versus conflict. So the, the TV show, right, focuses obviously on, on creating as much conflict as possible. It's a drama, it's kind of like a dark comedy, it's got, right, the whole thing. So it's In that TV show, the entire TV show is basically about the backstabbing, about the conflict that's going on. So the Roy family, right, is infighting and backstabbing, and then the next leader is going to be driven by personal ambition and basically who can just like survive on top, right? This is a family, by the way. They're all like related, brothers and sisters. Okay. In real life, is that the right way to do it in real life? Probably not, right? like in real succession planning, the goal is actually to reduce conflict and increase that continuity of operation, right?

Yeah, because conflict, sure, conflict works on HBO and conflict works on reality TV shows. It does not work well in business. Like, you want to avoid conflict and increase continuity, right? When the leader changes, leadership changes, there's enough that's changing at the top that you, that you want to have some continuity throughout the whole organization and have everyone to be as much as they can to be on the same page. Because no matter what people say, you can't plan for everything in succession planning. But what you can plan for, it, you know, should be planned for, right? The way that the new leader deals with employees, they should know how the prior leader dealt with employees and communicated. and kept them up to date about the business. Things you— the things you can plan for, you should.

No question about it. But again, you're gonna start by looking at this in the way in which you're gonna kind of mitigate future conflict, right? That's one of the objectives, is actually to mitigate the issues that are going on with the ROIs by having a plan, by everybody knowing what that plan is, and that plan being settled hopefully well in advance of an adverse event like the owner dying. Right. So, first thing is, let's make sure that we reduce the conflict. The second point of comparison between the TV show Succession and actual succession planning is rational decision-making versus emotionally driven choices. Okay. So, which do you think belongs to real succession planning versus the TV show Succession? So, it's rational decision-making versus emotionally driven choices.

Well, Succession, success in the show, emotional. Success in planning, rational.

There you go. Exactly right. Decisions are data-driven. We want them to be based on performance metrics. We want them to be based on leadership competencies, right? The needs of the organization, right? We want to minimize the personal bias. We want to basically have, you know, we don't want the personal vendetta and emotional manipulation that goes on in a show like Succession. We're actually trying to have that not happen, right? So the succession planning, once again, is the rational decision-making outweighs any kind of emotionally— emotion. That doesn't mean there aren't emotions involved, because there are, right? There definitely are. The ability to be able— we have come across situations where the family-owned business is not— it is very dysfunctional. It happens. But you know that if you want your business to be a successfully sold business, Then whatever you do from a succession plan standpoint is going to be a major part of that. So showing a buying company, okay, or a buyer that you have a strong succession plan and that there isn't any infighting, and then everybody knows who's going to have the corner office in the family the next time around or whatever, that's, that's, that's an incredibly important place to be in order to be able to raise the salability of your company, right, John?

Yeah, and if you're from— if you're a buyer and you're looking at a family-owned business and there's, you know, 4 or 5 potential successors and the person that's selling the company is saying, oh, I have all these possible successors that can help you run the business. Well, from one perspective, that's a good thing that there's someone internally that can run the business. But from the buyer's perspective, if it's not clear who the next CEO is, and it hasn't been communicated to people, that's very bad because all you've done essentially is pass along the lack of a succession plan to the new buyer. And when you could have handled it, right? The buyer is not looking to take on more problems in the future and especially problems that you could have solved.

No question about it. And I think that, again, when you're looking at a company that has a vacuum in its leadership, gonna drop that sellability way down, way down. That's one of the biggest issues. So the reality is, if a buyer comes in here, no matter how good the financials are, no matter whatever, unless they really think that the best thing to do, and we have seen this happen, that the best thing to do is to take this company out of the hands of the current family that's running it in order for it to survive, which is a viable thing sometimes. But again, it would have to have an immediate, you know, kind of incredible benefit upside It would have to have, uh, you know, incredible financial health. It would have to be so healthy in every other respect that it would be worth dealing with this. And I think dealing— and what we're saying is dealing with a, a, an infighting family that it can't decide who's in charge. Um, but the reality is this is the first— this is the fastest way to kill any kind of hope you have for selling your business, right?

Yes, exactly.

Um, so, okay, transparency. The next, next battle is transparency versus secrecy.

Yeah, I mean, secrecy does, does no— I mean, if you have the— if you have a formula for Coke or a formula for your— some sort of patent, those are the things that could— that should be kept secret. The, the things that should not be kept secret, um, are succession plans. So like, secrecy is something that would work well in a drama on HBO, right?

Right.

Not in a boardroom.

Right.

Transparency and clarity is another way I like to think of transparency is what's gonna happen if, if the owner of a company suffers from one of the 5 Ds. They die, there's a divorce, there's a disagreement, something happens and they leave the company or they're no longer— they're incapacitated, right? You need to have that transparency to say Joe's gonna take over, Mary's gonna be the next one, Paul is gonna be the CEO, and Dan's gonna be the CFO. You need that transparency and that clarity. Look, have the plan on the shelf. If you don't ever use it, it's better to have it on the shelf to need to use it than to need it and not have it.

At the very least, it's showing a new potential buyer that you have your act together, right? That you've thought this through, that you know how this goes and whatever. And of course, you're also showing how much you believe in the leadership team that you're leaving behind as the owner.

Right, exactly, exactly. By demonstrating, right, you're— that's a really good point, Joe. When you're, when you're putting something to paper and you've written something down and you've said that Paula is going to be the, the next CEO because of X, Y, and Z, and her experience throughout the, the company and her 15 years of experience and all, like, those types of things go a long way when a buyer looks at this and says, wow, like, we're not just buying the Joe Show. We're buying the company and the management team that Joe has put into, uh, put into place.

That's right. Now the TV show, the entire premise of the show is the secret, right? What's messed up, the most messed up thing about that TV show is that there, he's the, the, the, the, the father is intentionally hiding his succession plans from his kids, essentially making them kind of like, like battle to the death in front of him. Like this, the, the, this TV show is so bad. It's actually, for me, it was so hard to watch because it was like, no, this is so, so flies in the face of everything that we want to have happen in a situation like this that it's not even— it's like, it's not— it's, it's, it's, it's, it's human beings acting so badly and ever, like, in every way, right? And, and you're hoping that, of course, that in real life that, that this doesn't happen. Unfortunately It kind of does sometimes. So if you're in a situation right now where you basically are— if you have to keep things secret about any kind of succession or whatever within your company, then you've got larger problems than who your successor is, right? There's something else that's going on there that needs to be taken, that needs to be addressed. Because if you're walking around having to keep this stuff secret from people or whatever, then there's some other issue going on.

Yeah, if you're putting your employees and your family or your management team through some of the things you've seen on Succession, stop and don't do it anymore because you're getting some sort of, like, I don't know, benefit from it, but it's not benefiting you ultimately or the company because it's going to make you— it's going to make it impossible to sell your company.

That's right. Now, and that brings us to the next thing, which is basically, you know, it's organizational health. Versus individual power.

Yes.

So, what we want in real succession planning, right, what we don't want is, you know, preserving the power of the family, preserving the, you know, the father's presence, you know, or whatever, and not having a successor in the whole thing in order to basically kind of stave himself off from dying or whatever he thinks he's doing by doing that. Versus this notion of what we really want succession planning to be is a way of maintaining organizational health throughout some kind of adverse situation at worst, right? And at best, you know, into a nice transition that basically makes the transition actually smooth from Owner A to Owner B.

Yeah, and Joe, I have a couple of stats that I'd like to share that are some general succession planning stats that sort of They're interesting. So let me, let me, let me get through a couple of them.

Yeah.

So, according to Stanford research, 39% of companies lack a viable internal candidate for CEO roles, which highlights significant gaps in succession readiness. So that's interesting.

Yep.

While 86% of leaders view succession planning as urgent and important, only 14% believe their companies execute it well. And that's from research from Deloitte. And this, the last one's very interesting to me, which I didn't think. And I wouldn't, I shouldn't have, I would have thought to answer this, to ask this question. But according to Software Advice, 94% of employees report that having a succession plan improves employee engagement levels.

Exactly right.

So not only will your company benefit, right? Like you, like you personally, when you're selling your business, you'll benefit from having a succession plan because buyers will view it positively. The employees want that continuity. Like you mentioned continuity earlier. Continuity or conflict? It's your choice. Which one do you want? Continuity. Employees are more engaged. And even leaders, the stat, the second stat was 86% of leaders view succession planning as important, but they don't execute it well. So, It's something that they view as important for continuity purposes, but they don't really execute it very well, which you have to get better at that. You have to improve upon that.

No question. And again, you know, and some of the ideas that, again, that people don't really understand the steps that are involved in succession planning. They don't understand necessarily where the things that have to be included in the thought process around this. And some of succession planning isn't immediate. It isn't even, it isn't even actually a thing. It's really just a process that you would go through Eventually, at some point. So, for instance, you know, there might be a situation in which you don't have— you're not saying anybody right now. Let's put it this way. There would be situations we've come across where the net— where there isn't anybody immediately in the company that would be the next viable CEO, potentially. That happens all the time.

Yeah.

Okay. That's okay. Right. The idea would be to say is that you would then have to go out, potentially go outside of the organization to find and to tap someone who could be that CEO. Right. So that again, also fine. Part of your succession plan is saying that.

Yes.

Okay. In its simplest way, right, writing down the idea of the fact that this would have to be that you don't have— that you're saying, I don't right now do not have confidence in anyone on my staff to take over as CEO. So therefore, we would need to go outside to do that. And here are the requirements of that person and what we want them to have and everything else. Right. So you don't necessarily have to go out and find that person yet because you're not ready. But at least what you've acknowledged, right, is a truth, right? Something that you believe to be true about the company that is proactive.

Yeah. And based on what you just said, I want to read one more stat. I have a couple of stats here, but based on that comment, companies with formal succession plans fill 79% of CEO positions internally compared to those without plans. So what that means to me, Jo, is that when people go through the succession planning, miraculously, they find someone internally to do the job and be the next CEO. So in other words, what I think that stat is obviously is a little biased because it's saying that when they go through these, when you go through the exercise and you're looking for, then you're doing succession planning for all roles, right? Succession planning isn't just at the top. Succession planning is for the management team, is filling roles throughout the organization. But when you start looking for people and you set the criteria, you're going to, again, if you go through the process, you are going to find that you have CEO candidates that may be nontraditional, maybe something that you didn't think, maybe something that your, that your HR partner or HR firm wouldn't have identified. But when you go through the process, like, wow, This person's been here for 15 years. They've been here for 20 years. They know the business like the back of their hand. Those candidates, those maybe nontraditional candidates who maybe don't have— lack an executive presence or need a couple of things to fill in, those can be your CEOs. And sometimes in history, those have been some of the most successful CEOs in history. I mean, look at Tim Cook, right? Tim Cook from Apple.

Right.

Homegrown. Homegrown. He was an— he's an example of someone I'm sure that the recruiters at Apple were going through and saying, no, we need to find this. They're going to the board and the board either identified— I'm assuming that was succession planning. They said, no, Tim Cook is the next CEO. And look how Apple has flourished during his tenure.

That's it. Because they've aligned, you know, it's, it's with a mature company like that, right? The risk that you take by changing CEOs is you're risking direction, you're risking potential culture. you're risking personality conflict. There's all kinds of things. The ability to be able to think well in advance of who you want and the character traits and the things like that, because finding a new CEO could, you know, they were lucky they found, they were able to tap somebody internally, right? The reality is it's actually much harder to actually do that, especially depending on the size of your company and stuff, right? So understanding that, again, what What John points out here so nicely is, again, this is the truth behind exit planning in general, which is that this isn't about the answers necessarily. It's not about having the answers.

You're right.

It's about asking the questions. And I think that what those statistics clearly demonstrate is that people say, when asked, yes, succession planning is important. I can see why continuity and making sure that employee confidence and client trust and overall value of the company is all at stake. Right? At when there's a succession happening, right? But the idea is being able to be clear-headed enough to be able to ask and examine your, your, your company honestly, to look at it, take an honest look at your employees and their ability to step up and who's gonna be that person, and then be able to take a look around outside your organization to be able to, to, to potentially look for those people as well. Right. And so what, what, what, what succession planning is, just one more example, okay, within the entire exit planning process of asking questions of yourself and asking questions of your company. That's what this is.

Yeah. And, and, and to build, to build upon that, excuse me, is a lot of the things about succession planning that maybe you, you, you say a candidate isn't ready or there's some flaw that you've perceived in the candidate. Well, don't forget that they're an employee, that you're, that you're the owner of the company and they're the employee. And if, if they haven't been given the opportunity or they haven't been— something hasn't been presented to them and given them the chance, well, that's as much your fault as the owner as their fault. Yes, some people make their own opportunities, but other people do their job and, and their, and their, their personality by definition Is is they need to be challenged, and that's your role as the owner of the company. Yeah, your role is owning the company, but your role is also if you're planning to sell the company is to maximize the value of the company. Yeah, that's revenue, that's profit, that's making sure your supply chain is is diverse. But don't you can never forget about the sometimes depending on your business, the most valuable asset for your business walks out the door each day, and if you're not investing in your employees. And investing in their future, frankly, selfishly, so that their future can profit you. Right.

That's it. Right. It actually is a benefit to the entire organization, right? Not just to one individual or another. And I think that, again, that there are some very common— there are about 4 common mistakes that people are going to make around exit planning. And I think the statistics that you're sharing this out. First of all, you, the, the, you wait till plan— like anything else, you don't plan, you don't plan, you don't plan. Now you get to a point where you need to plan and it's too late.

Yep.

So either you're in denial, you're, you got an emotional attachment, which is also incredibly common, okay, and something that you really need to— I, I can't emphasize enough the ability that it's going to take as any business owner to be able to— you're asking hard questions of the business But what you're really doing is asking harder questions about yourself. All right? And what happens is, and this is what we saw in, and again, we know that we're making a joke about the TV show Succession, but the idea in Succession, right, highlights this, which is that if there is an emotional issue, okay, that plagues the owner in terms of, and that's in direct relationship to the owning of the business, meaning I am emotional about leaving the business, I am emotional about I'm going to leave the business to. I have an emotional potential problem about ever, you know, being— ever feeling good about myself if I'm not working on this business. There's all kinds of things out there, right, that people get caught up in emotionally.

Yeah.

And so the, the, the, again, one more thing here is that if you can't ask yourself these hard questions now when there's no pressure to do so, how are you going to do it when they're— when you're under the gun to do it? Okay, and what I mean is You come along and someone now, you know, you're motoring along just as you are and you haven't done any of this planning. Okay, you haven't done anything. You haven't done any succession planning. You haven't really done any real exit planning. You're just running your business. You're going along like you have been for the last 30 years. Okay, someone walks in the door or calls you on the phone or you get a cold email that says, hi, I'm so-and-so from private XYZ private equity company. I am interested in your business. Let's have a conversation. Okay, how many people out there have gotten emails like that? Show of hands. Yes, hundreds. Okay, it happens all the time. Now you're in a situation where you're like, hmm, well, that's piqued my interest. Let me explore this. Okay, so now what you do is you go down, you talk to the guy, he comes in and says, great, this is what we do. We're going to do— we're going to look at your books, we're going to X, Y, and Z. Of course, and you're all alone, right? You have no advice, you have no help, you're just all out there in a very seasoned professional private equity person is now starting to examine your business and it's going to start to pick it apart. Okay, and they're going to start with evaluating, you know, whatever is going to— the process is going to be different. Then maybe there's a broker involved, whatever. But the notion here, okay, is that when you start to think about, about who my successor is or who runs the business after I'm gone, when you're at the table with the, with the, with a, with a potential buyer Right? This is way too late. Way too late. And, and the fact is that if you have no succession plan when you meet there and that you can't produce a document says, this is how we— how I see— because the first question that one of the buyers is going to ask you is going to ask you, what are your plans for yourself? What happens to John, the owner of this company?

Yeah.

And if you can't answer that question or you don't know or whatever That's a red flag, man. Doesn't mean that the deal won't go through on its own, okay? It doesn't by itself, but it is a red flag.

Yeah. And what it means oftentimes is you're thinking of yourself, right? You're thinking of what you're going to do later, whether it's the new business you're going to buy or the franchise you're going to acquire or the beach you're going to sit on or the, or the mojito that you're going to be drinking, right? As opposed to Really thinking about the business you're selling. So again, the buyer wants to know that you've really thought about these things. Yes, you've locked down your customers. Yes, you've talked about your suppliers and you've mitigated things that you've learned from the pandemic. But if you don't have people that are going to run the business for this buyer, man, talk about a red flag.

Absolutely. And especially, God forbid, if there is some kind of adverse event, right? What happens if you're the owner and you get sick? Right? You start being— not being able to show up and the whole thing, and there's no plan. Who's— now that— now the— now the business is in chaos, right? Now the business can't run. Now the business— and God forbid the business relied on you as the owner to make decisions every day, right? Now you're in a situation where the business is, is tied directly to your health, right? That's a very bad place for your business to be. Okay, now maybe you don't care. That's perfectly fine. That's, that's your, your choice, right? We're not gonna— we're not sitting here making you care. But what we are saying is that, is that if you care even a little bit, that you will start to think about succession planning not just as picking a successor, but as, as a process that you need to put the business through to be able to make sure that you can, that you can raise its salability and its value And, and some of the other things that come by way of it, like happier customers that aren't freaked out when you sell the business and walk.

Yeah, because, and just to build on what you said earlier, was a succession plan is simply not picking a successor. My, one of my old companies went through, we went through succession planning and we went through and it was throughout the whole organization, right? There was, there was a number of business units and each business unit was tasked with Going through the succession planning process. And again, if you don't have another bunch of business units, you're not that big. We understand that you're sometimes smaller than public traded companies that I'm mentioning, but it is still important to go through this process to groom, not only to pick the leader, but to groom the next generation of leaders too.

And look, let's talk about that for a second, because again, that's the thing. It's a matter of, look, if you want, if anybody's concerned about legacy in any way, shape, or form, Okay? And I'm not saying you should be, but if you are, and many people are, then one of the things you— and again, you don't have necessarily have an immediate successor within the family, if it's a family business or anything else. Your ability to be able to groom the next generation of leadership, okay, is something that every business should be concerned about, right? Because we all know one thing is for certain. We will all exit our business somehow, some way, someday. Yeah.

And also, and also, yes, you're going to exit your business someday, but also attrition at your company is inevitable, right? Anyone that runs a business, there is, you know, a large part of your business, of what you're doing is finding people, especially with employment so low. Is, is again, it's succession planning for you, but it's also planning for the inevitable loss of a CFO, of a director of operations, of someone who does a critical function at your business, who, if you ever— if that person ever wakes you up at night because you had a dream or a nightmare that they left, that's another reason to do succession planning. You can't be so reliable on a few key employees. I mean, it's sort of inevitable to have key employees. But you need to have a plan for after Kathy or Paula or Sarah or Bob leave the company.

And it's not just employees. I mean, here's the thing. If I'm a buyer, right, and I'm coming in here and saying, you know, Bob, if you leave your company, what happens to the relationships you have with these customers? Right? The best thing you can do proactively is to have alerted the customers already that you are on your way out and that Tom here is being groomed. You know, who you know is being groomed to be the person who takes this stuff over. And that goes for customers, suppliers, other stakeholders within the company, right? You might be— there might be sister companies or something else involved, or whatever stakeholders there might be, board members, whatever, right? And so the transition plan isn't just for you, it isn't just for the buyer, it's— it makes the business healthier.

Well, Well, yeah, I mean, you've run agencies and you've had employees leave who handle key accounts, right? I've been a part of that situation where, where you have a key employee who leaves. Um, actually, in that case, the person was, was, was, uh, involuntarily left the company, if you know what I mean.

Right.

And, and we had to, you know, we didn't— it was— we were caught flat-footed because it was something that was out of our control that the person left, and we had to get on the phone. I remember having to, over the course of 2 days, we had to call I think 7 or 8 of his clients and say like, hey, you know, James is no longer with the company. And it's a nightmare. It's difficult. And no, we had not planned for it. We had no sense of— he was the only person that clients talked to, which was bad, right? You want multiple people talking to clients. He was essentially the face of the company to those clients. And yeah, the salesperson brought them in and stuff. But it was a very difficult set of conversations, and we ended up losing a couple of those clients because they really appreciated and they only knew Jim through—

That's right. And the potential buyer that's in here looking at this stuff, right, is going to say, you know, what do they want? They want to make sure that you hold on to all those relationships, right? They want all that revenue to make sure that thing is tight, is solid with them when they get the thing. And when they take over, you know, control of the company. And, you know, if you have— if you've got clients who are bailing because they don't like, you know, who's taking over, or they weren't prepared, or they weren't— it wasn't discussed with them, or they had no idea, or whatever, they're panicking what's going to happen. Or suppliers the same way, right? It's not just about customers. You know, this is the kind of thing that you can do again. You can head it off at the pass, right? There's no need to surprise these people. You can make a, you can make a great show of the fact that you care so much for these clients that you're making sure that, that their interests are protected, you know, in terms of the people that are servicing them and that kind of thing. So yeah.

It won't make a great HBO show, like, right? Your continuity plan and your, you know, your goal, maybe to tie it back to Succession, the show, is your goal is to make your succession plan Not HBO-worthy, right? You want to make it so boring and so wrapped up, predictable, and yeah, so predictable, um, so, so smooth in implementing that it would just— it would be the most boring show in HBO history.

That's exactly right. You're protecting— and when you do so, you're going to be protecting your business value. So the first thing is to understand, guys, is that succession planning Number one, it protects and maybe even enhances your total exit value.

Yep.

So just having a plan, it doesn't even matter really what that plan says. The, the, the fact that you have a plan, that you've thought through this, that you can present, provide an answer to this question, instantly raises the value of your company. That's just the truth. Building a leadership pipeline, okay, is the other thing, because again, that helps manage and grow the business in the future. So understanding that if you can look— look, good sports teams, right, they know they're 3, 4 levels deep, right? They may know that at certain positions that they've got a lack of depth or whatever, and they need more help, and they're gonna have to live with that, and they're gonna have to cover up for it in other ways or whatever they're gonna do. But they know, they don't not know. They're not blindsided by it. Oh, I thought we had a 3rd running back. What do you mean we don't? Right? No, that never happens. I mean, the 3rd running back may not be, you know, maybe a big drop-off between 1 and 2 or 2 and 3.

You got one.

But they know what it is. And so, so the idea is that, again, if you are ignoring this, if you are not in the, in the game with this in terms of being able to actually sit down and identify, you know, what is your leadership pipeline, who Who is next? Who are you examining? Who do you need to give chances to, to try to actually give them experience? All this stuff can take time. Right? And so if you're not, if you're waiting again to the last minute to do any of this stuff or think about this stuff, it is going to, it's going to have a negative impact on your salability and your, and your overall value. End of story.

Yeah. And one way, right, one way that you can build that leadership pipeline that Jo mentioned is You have projects that need to get done in exit planning, right? You need people to lead those projects. This is the perfect opportunity to give those people a chance, to give those people a chance, because if they can run a successful project at your company— let's say that you need to improve your financial statements or document your operational processes or recruit more people or do whatever you have to do for your business— one of those things that you identify in exit planning, Assign an up-and-coming leader, an up-and-coming employee, someone you, you want to test, frankly. Give them the opportunity with that project. And yes, you can have a mentor. Yes, you can be involved, but they can do 80% of the, 80% of the project. That's what happened in my career, right? I was given the opportunity to do a huge project.

Sure.

And it went really, really well. Some things didn't go really well with that, with that project. But, but I was given this opportunity and ultimately it It went really well, and that was a career-building thing for me. And I know for a fact that my boss— it looked good to my boss's boss because I was doing this project and flying all around the country with this project that was critical to the business.

And exactly, and then, and they therefore, they knew that eventually you were going to be able to be someone who could potentially, you know, fill in that spot in the next level, you know, next man up, so to speak.

Exactly.

So the other, other, other couple of other, other benefits here too are that it's obviously going to make the transition. So we, we haven't spent a lot of time yet talking about the transition piece because it is— it— because mostly because it is such a big piece of, of, of, of this that it, it's, it's going to take some time to devote. We're going to— there are going to be several different episodes just about the, about the transition itself. Meaning, right? Because, well, the emotional things, the stuff that goes on in transition, the whole thing, are after the transaction is done and you are now in a situation where you are integrating 2 companies or you are bringing a new owner in, you know, to an existing situation from a culture standpoint, all that stuff, right? One of the things that transition, that proactive succession planning gives you, is helps to ease that transition. Because employees know, they know what's gonna happen, right? It's been, it's been communicated, it's been documented. Everybody understands what the process is gonna be, how it's going to work. Customers, other stakeholders, all those things, right? Every— it makes the transition easy for everybody if you are proactive about it and you communicate it well and you have a solid plan. Okay. The, the last piece, Dude, it's, it's creating the, the peace of mind for you as the owner and potentially for your family, right? How is it creating peace of mind? Because you're gonna know what happens. You're gonna know that son number 2 is gonna take the CEO job, and whatever drama has gone on as a result of that decision, let's get that done and out of the way.

Yeah. Make it your problem and your thing to solve as opposed to adding, because inevitably the buyer will view things as that you might not view as problems as problems, right? They will have a set of problems and trust me, they all come up with problems. They're looking for them. Yeah, they're looking for them. You don't want to add to the problems that they, that you don't even realize are problems from their perspective. Because having a family problem, they're not going to be any better at solving a family problem than you are, right? You know the people much better than this nameless buyer is going to come in. They don't want additional problems. They view an acquisition as a huge challenge for them. Trust me, even private equity firms and big firms, acquisitions are a lot of effort. Don't add to their problems.

Yeah, don't add to their problems. And again, try to make the integration part later on as easy as possible. You know what I mean? You've got to be able to— and again, we're going to talk about all this and how to actually plan out these kind of integrations because they're where the deals go bad often is after the deal is done. And so being able again to mitigate that by understanding what the succession plan is and who is going to take over. And by the way, You know, one thing we would recommend is to get that done ahead of time so that by the time the company's actually for sale on the open market, you have a history of this leadership team managing this company without you, because that's gonna go even further away in terms of proving the value of the company, proving the worth of the leadership team, proving the capability to the new buyer because you have run for a year or 2 in this way. Right? So don't— the other thing is about succession planning is it's not just about what happens when I sell, okay? Remember, it's about having those things in place. And as we've spoken about before, Jon, one of the biggest things that you can do to sell your business is to make sure that you as the owner are out of the way of it, right?

Yeah.

Meaning that you are detached from the business where you are. This is the perfect example of showing that you've got a leadership team that knows what they're doing. And can run this business and the whole thing with a new owner without you, and that that's going to be a very smooth transition.

Again, we say it all the time, we're working— you should be working on your business instead of in your business.

In your business. Exactly right. So let's just talk real quick about the— about what are the steps, okay? Because there are some, some, some specific things that we teach, that we implement when we're doing this and helping people do this. And so we're going to tell you what these things are. So get your pen, your paper, let's write these things down. Okay, it's very simple. The first thing is that you want to assess your leadership needs. Okay, where— what are the things that are going to be the things that are going to come up, right? Obviously, I leave the company as the owner. If I am the CEO, that's a natural thing. Who is the next leader of the entire thing, right? But, but when someone moves up, potentially there's another hole filled— needs to be filled. Right? So you've got to be able to look at the entire leadership team. Who is it? What do we need? And again, this can be a today versus a, you know, a future look. Right? So in other words, you can be basically building your leadership needs kind of as you go, but identifying what those things are and creating a future state. In the future, we're going to have a CEO and a COO and a CFO. Right now we have a controller and, you know, and a president, whatever. Right. But we're going to move to those things. So that's the other thing, identifying what is the leadership needs that I have. Right. And what am I going to have and how those things trickle down within my organization as I make changes?

Yeah. And if you're, if you're involved in the business with, like, most owners are, right, that happens and you're doing a couple of jobs. The example that Jo mentioned before, You need to build up the skill set and again, give more responsibilities to people who will be the CFO or the president or the COO in the future. That's the way that you prepare these people. Sometimes it's projects like we mentioned before. Sometimes it's training. Sometimes it's consultants.

Outside external training. I've had clients and saw things where they sent them to work for another company for 2 Yeah.

And I've had consultants come in and help train on processes. We had an incredible process person come in and build a process map for us for a big project back, you know, in 2013, I believe, 2014. And it was incredible because it built up this, the, the process mapping skills of people that was required for this particular role. So it was an excellent hire, excellent consultant. Worked with us for 2 and a half years.

Yep, absolutely. So those are the things, again, the, the whatever ways in which you need to identify based on your business, but you want to take a hard look at this. And again, you know, get your current management team, whoever it is, the people you trust, get them together in a room and start thinking about this stuff. What happens when I go? What happens when you go? If there's another partner, if there's another other C-level executives, what happens when they go? How do you fulfill— how do you, how do you, how do you fill sales roles? All these things, obviously, and if you've got whatever HR component, you've got to get them involved too, because potentially what you need to do next is identify the successors, who they are in terms of the company, and be able to put together a plan for grooming them. Yep. Like you said, the training, the mentorship, how are we transitioning these roles? When is this stuff happening? What am I trying to— what are the needs of those people? What are the skill needs those people need? in order to be able to fulfill that role later on.

Yeah.

But you're also going to look at external candidates potentially for those roles too, at least to identify where they are, whether you need them now or in the future, but identifying what those— who those people can be.

Yeah. And the external candidates, yes, A, they can help your company, full stop. But what I've found in my career is a lot of people, again, judging from the stats earlier, People internally are often overlooked, right? They're often overlooked and they don't— people don't realize the skill set that they have internally because it might be perceived as easier to find someone externally than it is to find someone internally. That's not true. If you know your company and you know your people, you— sorry, you should know the people at your company.

Right. They're within your walls.

They're a defined group of people who you pay Every 2 weeks, every month, whatever it happens to be. You should learn all the skills and the aspirations of those people and what they want to do with their careers. If you don't know that, how can you plan for succession? If you don't know that the director of finance wants to be the CFO in 2 years, and if she's not CFO in 2 years, she won't be anymore, right? She's gonna leave. Because people take up these opportunities. So Just, I want to implore people, I've been overlooked internally at companies before, and it sucks. And when you're overlooked, what you do is you look to leave the company. So know your employees, know what they want to do. You might not be able to satisfy all their aspirations. However, you should know them so that you don't overlook them.

Absolutely. And again, what you're trying to remember, what you're trying to do, ultimately, the reason you're doing this is to make the company more attractive. More saleable, right? Higher valuation, right? And if you, and if you are in a situation where you continuously overlook people and they know this and they leave and they've, they've left and the whole thing, that's a bad reputation. And that's something that's gonna come out in due diligence. It's gonna, they're gonna be interviews with employees. They're gonna find out. And the reality is, is that this kind of thing that where you are, you are, you are also potentially letting people who really know your business and potentially really love it.

Of course.

Go as well, which is a serious problem for the future.

And look at, look at Glassdoor. Your company might not have Glassdoor reviews. Trust me, you know, if you're not big or you're small, you know, you're sometimes you're not going to have those, but sometimes you do. And look at the companies with, with these things, lower overall ratings and comments from employees that go something like, no room for advancement, right? I've been in my position for 4 years. And the corresponding ratings that they give. People do not like to be pigeonholed, thought of as, as, as, oh, you're the director of this, or you're the senior manager of that. No, no, no, no. They like to be looked at as an employee who can, who can rise, who can grow with the company. And when you have people that have gone from, you know, the lowest level of the company, from, from a McDonald's fry cook all the way up to the CEO, That's a great story for employees to tell. So—

It's a great, by the way, it's a great story for the company to tell too, because it says a lot about the company, right? The fact that they, if you're, if you are the, if you are a kind of company, and some people are just good at this, right? Some people are just good at spotting talent, and they're just good at it. And they're able to put people in the right positions or whatever. And that's great. It's like anything else. It's not, you can't be good at everything. But some people are good at that.

Yes.

The ability to be able to identify people and be able to put them in training and get them the right thing is a skill. So again, just like anything else, if you can't do the skill, then go get some help to do the skill, right? There are plenty of people out there. You know, obviously we can help you do that, but there are lots of people out there that can help you actually identify, help you identify and create a succession plan and look for candidates. There's HR, You know, consultants, all kinds of people that can help you with that. So if you can't do it yourself, raise your hand, ask us, we'll find something to help you.

Yes.

The next thing you're going to do after you've— you've now— so now what have you done again? You have assessed your leadership needs. You've seen the holes. You've seen where things are— the holes are going to be. You've identified and you're— and you now have plans to groom those successors. And so what you're going to do is make sure you document what that is. And making sure that in that transition process is well documented. And then obviously make sure that that process goes through anybody it needs to go through so that there's buy-in in terms of however you need buy-in within your organization, making sure that again, there's not gonna be a ton of— what you don't want again is an episode of succession. What you don't want in this situation are people pushing back, especially at critical moments. So making sure that you communicate this to all the stakeholders, clients, whoever you need to do that. This is our succession plan. And again, maybe you're even, depending on who the audience is specifically, maybe just saying you had, you, that you have worked on a succession plan and that you have done it and that you have an idea of everything moving forward. That might be enough, right? But what we see and what we, we, we tend to kind of, you know, to consult on is to say, no, communicate this to the entire organization, communicate it specifically to your customers and your supply chain relationships and all that stuff so that everybody is aware. So when a buyer comes, there are no surprises, right?

Yeah, and there's no surprises, and there's also no confusion, right? There's no, oh, I don't know what's happening, or this— oh, this— I mean, again, nobody really likes surprises. Maybe kids on Halloween, trick-or-treat or something, or surprise birthday parties, maybe someone like that. I don't like them. But like in business, surprises are viewed negatively, right? When a CEO resigns and you see it on Yahoo and it's like, whoa, wait a second, you see it on Google News Alerts, like, wait a second, this happened? Oh no, no, the stock goes down in most cases when there's a surprise change in CEOs. Right.

The other thing that goes along with this is that as you groom and you pick new people to do things, you need more process and you need more documentation of process. Yes, systems. Right? You need the ability, decisions, decision trees with decision points, who gets approval over things, right? As your organization changes, that stuff changes too. So don't forget about that piece, right?

Yeah.

You build the systems that help you have the continuity that go along with the people, you know, the people and the grooming and the training and, and the, and the, you know, position changing that, that will go on with this.

Yeah. And sorry, sorry to interrupt, Joe. One, one thing just to mention, Again, you think about your products that you're selling. You often— we're talking about thinking about people. Don't forget about process in this whole situation, because process is what sort of is the glue between the organization. When people leave, when products change, when you have process to document what happens and how things are happening, process is often the 3rd P that's often forgotten about.

And making sure, too, that when you are doing this stuff within the process, that there are timelines and milestones and you know where those incremental steps happen, where responsibility transfers, all that stuff, right? So understand that you're saying, look, if this is on exit, this is on the death of the owner, this will happen. That's one thing to say. You also want to make sure that those other 4 Ds are covered off on what happens when there's a disagreement between partners. What happens when there is some kind of distress befalls the company, right? All those things, you wanna make sure that those things are thought out in terms of when this stuff happens. By the way, you're also probably— our recommendation is almost, almost always this: if you can remove, as the owner, if you can remove yourself from the business ahead of putting the company on the market and have the management, the new people step up into those roles first, that is preferred. Okay, so in other words, if you are able to get ahead of this curve and show new management that you are already out of the way, that is a bonus. Okay?

Yes.

It will clear the— it will clear the way for a sale to happen better than just about anything else. Now, still have to have the books, still have to have a good viable sustainable business, still have to have all those things. So we have You know, good supplier relationships, good customers, all that stuff. But if you can get out ahead of it and demonstrate for a year that your new management team is very capable of doing this, this will— this is going to raise your saleability tremendously.

Agreed, agreed 100%. And again, that is the opportunity for you to— those are tests, right? Those are, if you think about it, those are projects. Right? They're, in a way, the projects that you're doing, that you're having people run, but they're really projects when you put a person into leadership. It's a— yes, it's a job and they've moved into the CFO role, but if they're screwing it up and you'd be better off replacing them and you've made a bad decision, there's opportunity to do that. No decision can be unmade, right?

Right.

You don't have to stick with the decisions you make. And we realize that that everyone makes mistakes, right? I make mistakes all the time. Jo even makes mistakes every once in a while. But to test people and to get people into those roles, it's so critical from a buyer's perspective to show that, to demonstrate that the business can run without you.

No question about it. And in order to do this, guys, I think it's really important that you start thinking about this right now. So again, all we want you to do right now is ask yourself the question.

Yep.

What happens when I leave? What happens when my partner leaves? What happens when these key leadership positions leave? And who's next? Who are we looking at doing? And when should that happen, right? Where am I going to find these people? Are they coming from internal? Am I going to look at everybody? Am I going to look at external sources? I'm going to look at a mix of both. I'm going to have a plan as to what happens. And if I can do that as part, again, or as my— of my overall exit What you have then is a way of being able to increase or maintain at least the value of your company, increase or at least increase or maintain your saleability, and increase the number of buyers potentially that will be attracted to you based on your situation. So, again, all of this comes down to value. It comes down to saleability, right? Having a plan in place that is a viable succession plan that says what happens Just having the plan alone will increase your, your, your, your salability and the value of your company probably 15 to 20%.

Yep.

Just, just having that. Okay, so don't overlook this stuff, guys. This is not the kind of thing— it's, it's— if you need help doing this in any area, obviously you know that you can always come to us. Uh, you can write me an email right now, joe@myexitengine.com, if you like. We answer all questions. You can come and find us. On YouTube. You can find us on LinkedIn. You can find us obviously wherever you get podcasts. This has been the Linked— sorry, this has been not LinkedIn. This has been the Exit Engine Podcast. I'm Joe Stapleton. That's John Kniff. We've been talking about succession planning, the importance of that. So make sure— let's get your— let's start thinking about your succession. Who's going to be next? Is it going to be a family member? And remember, when you do this planning, guys, You need to make sure that you tell the parties you're talking about, okay, that you are considering them for these positions. As John pointed out before, make no assumption, okay? You cannot assume that something that you want to have happen is something what the— that the other person wants to have happen. So make sure that you don't get caught with your pants down that way either, where someone suddenly says, congratulations, you're the CEO, and you say— and the person says, no thank you, I don't want to do that. That would not be good. So, again, keep in mind that what we're trying to do here is increase the value of the company, making sure that you can demonstrate to new buyers that there is a succession plan in place, that everybody knows what's going to happen, and there won't be any issues in the transition. That's kind of what you want to be able to promise them, right?

Agreed 100%.

Excellent. Guys, this has been the Exit Engine Podcast. Thank you so much for listening. I'm Joe. That's John. We are here every Friday for you, and you can find us again at YouTube. You can find us on LinkedIn primarily, and anywhere you get podcasts. Thanks so much, John, for your time today. Really appreciate it, buddy.

Thanks, Joe.

We'll talk to you very soon.

Cheers.