Roundtable on Succession Planning | Crain’s Chicago Enterprise

What recent trends are you seeing in succession planning? What effect has the pandemic had on these transitions? Are you seeing more of them or less?

Alan Weed: We’re seeing increased interest and awareness. Companies that successfully navigated through the health aspects of the pandemic are now dealing with inflation, supply chain and labor issues and the problems are more challenging than ever. Many baby boomer owners who delayed an exit during the pre-pandemic economic boom are spending their late-stage career years in a different way than they envisioned. We have seen this cause more business owners to focus on finding a solution that allows them to retire or exit from their business and get some help navigating this challenging operating environment.

Melissa Mabley: The pandemic and subsequent market conditions, coupled with an aging generation of business owners, have led to several trends in succession planning. The Great Resignation brought into sharp focus the fact that succession planning can’t center only on c-suite or senior-level executives. An organization is vulnerable any time a key producer or stakeholder departs, and as a result emergency or contingency planning has become an increasing trend. Baby boomers approaching retirement age own 51% of private companies, and have cited market conditions and economic outlook along with their health as primary reasons for considering transitions. The rise in interest rates and increasing cost of capital could negatively impact the sale price of businesses. Additionally, as interest rates rise, securing financing can be a barrier to entry, reducing the pool of potential buyers.

Michael Gray: Potential tax law changes are driving family-owned and privately held companies to review and update their succession plans. Additionally, the influx of private equity firms entering the market has changed the way many companies view their succession planning. The potential for a private equity backed exit transition has become an increasingly attractive option. The pandemic has changed the dynamic for many businesses and increased their risk profile.

How can companies avoid contentious exits of leadership and key staff during transition periods?

Weed: One effective approach is to practice transparency and communicate the succession plan to key members of the company. In doing this, you are showing your key employees that not only do you care enough about them to keep them informed, but that they have an opportunity to be part of the company’s future growth. This is very important because a common reason that employees leave a company is that they don’t see potential for the future. Additionally, there are other compensation-based strategies such as retention bonuses that can be useful options to help make sure a team stays in place after a business has been sold.

Mabley: Just like in any relationship, communication is key. Absent communication, people may draw inaccurate or incomplete conclusions. In a family-owned business with non-family employees or leadership, communication is especially important during times of transition. Non-family employees often have concerns about nepotism that can be difficult to overcome; a primary goal of a family-owned business is often to provide employment opportunities for future generations within the family. Demonstrations of the future leadership team’s aptitude and commitment to non-family employees over time will also inspire confidence.

What tactics are most successful for cultivating and maintaining talent and future leaders?

Gray: Looking ahead and evaluating the future needs of the business is the cornerstone for developing talent and identifying future leaders. The business needs a roadmap to guide it regarding what sort of talent is needed and how to foster and maintain it. Focus not only on the strengths of the current team members but also their weaknesses. This analysis provides company leadership with a chance to address weaknesses in advance, whether it be through training to address skill deficits or the identification and hiring of outside talent to fill the specific needs for the future of the business.

Structuring the company’s board and its meetings properly is important. Be sure the board includes third parties from outside the business. The board needs to plan out an annual roadmap of key items to be discussed at each meeting in addition to the day-to-day activities. Meetings should include senior management and the next generation of leaders and give them the opportunity to present to the board, grow their presentation skills and feel part of the enterprise’s future.

Weed: We attract and maintain talent at our portfolio companies by creating a strong culture where our employees are empowered and see opportunities for advancement. One way we do this is by formulating a joint strategic plan alongside our management immediately post-acquisition to align on a growth strategy for a company. We collectively identify areas of opportunity or needed investment and execute on them together. This complementary approach provides key employees the autonomy to drive the direction of the company, but with a partner to support them with capital and expertise. Additionally, we also focus on compensation design to make sure that our packages are leading-edge and frequently utilize stock-based compensation plans to let key employees participate in the meaningful value that they create.