This article appeared in the December 2019 issue of MiMfg Magazine. Read the full issue and find past issues online.
Running a business isn’t easy and running a business across multiple generations can sometimes feel impossible. The vast majority — approximately two-thirds to three-fourths — of second-generation businesses fail. By the third generation, the failure rate exceeds 90 percent.
From the moment you start a business, you are fighting to keep it going and changes to leadership only heighten that tension. One wrong leader or one poorly timed transition and everything you’ve achieved can disappear. The further away a business gets from the leaders who had the initial vision and passion to build it, the harder it becomes to maintain that success.
A succession plan can be the most important part of your legacy as a manufacturer. By providing the business with a blueprint to survive, you increase the odds of being there for generation two, three, four and so on.
But what makes a successful succession plan?
MMA members Koeze Company, Lomar Machine & Tool Co. and Stormy Kromer have all fought to develop their own transition strategy while associate members like EDSI Consulting, Kerr Russell and Weber PLC, and Maner Costerisan use their knowledge and experience to help countless manufacturers create viable succession plans.
Consider how their advice can support your brand’s future and connect with MMA’s associate members for help in developing your own succession plan.
Preparing for Unexpected Transitions
“Just like good strategic planning, succession planning provides a sense of direction and stability for the future,” explained Gina Jacquart-Thorsen, president of Stormy Kromer, a division of Jacquart Fabric Products. “By having a succession plan in place for key positions — from ownership to executive leadership to production management — you give your company a stable foundation by which to succeed now and in the future, without the distraction of worry and stress about who will be filling these roles.”
While some companies benefit by knowing its second or, in the case of Stormy Kromer, its third-generation is being prepared to take over ownership and leadership, many companies don’t. Issues like a sudden death or a family-owned business with either no future generations or a lack of interest from future generations can turn clear succession into a haze of uncertainty.
“Succession planning is important and should be managed continuously. There is a short-term aspect — what if somebody dies or departs suddenly for some reason — and a long term aspect — when are people planning to retire, hoping to move to part-time, etc,” said Jeff Koeze, CEO of Koeze Company. “For us, the most helpful thing has been to do a ‘hit by a bus’ exercise. We ask ‘what would happen if this person got hit by a bus today?’ This generates a document that captures all the key functions of a job in sufficient detail that somebody could in theory pick up the job and take over.”
Once you’ve considered what is required to maintain functionality in the event of unexpected transitions, you can start preparing for both worst-case scenarios and anticipated transitions.
The “Must-Haves” of Your Succession Plan
Of course, nobody wants to activate a succession plan due to unforeseeable issues like death or illness. In most cases, transitions will be expected — a retirement or a career transition either with an individual moving to a new role within the company or taking a new job outside the company.
“A good succession plan identifies and develops new leaders or staff members who are willing to fill the position and comply with the process once other leaders, or personnel, leave or retire,” said Ron Geisman, president of Lomar Machine & Tool Co. “Identifying candidates and developing internal people with the potential to fill those leadership roles is key to Lomar’s succession plan.”
According to the team at EDSI Consulting, to achieve maximum effectiveness (and minimum disruption) you should:
- Appoint a “champion” who owns the process of reviewing, updating and implementing the plans
- Identify all critical positions within an organization and estimate when the position may be vacated
- Create success profiles for each critical position
- Identify one or two potential successors for all critical positions — this can be done by developing a current organizational chart and an anticipated organizational chart set three to five years into the future
- Plan for the development of potential successors to ensure they can succeed if moved into a new role
- Review the plan annually and, if necessary, make updates
While large companies present their own unique challenges, a succession plan is especially essential for the small and mid-sized businesses that make up the majority of Michigan manufacturing.
“In my experience, a succession plan is often more important for a small business than a large business, because a small business frequently doesn’t have the necessary management talent or resources available to address the void that is created when there is an immediate loss such as the death of a key person or stakeholder,” explained Richard C. Buslepp, an attorney with Kerr Russell and Weber PLC.
Ask the Right Questions, Get the Right Results
“A proper succession plan should be written and communicated throughout the management team so they can include necessary actions in their planning. It needs to be flexible enough to incorporate changes, yet concrete enough to properly guide its execution through the most difficult tasks,” said Dennis Theis, CPA and CVGA for Maner Costerisan. “The plan should start with the needs of the owner(s) who will be the driving force behind it. That may be driven by family, financial, legacy, philanthropic or other needs. The plan must be aligned with those needs or the already uphill climb gets steeper.”
Your plan should clearly communicate key objectives, people and timelines and, to do this, you need to be asking the right questions (see below). As Geisman explained, “the questions we’re asking of our employees are if and when they are planning to retire because that determines the timeframe we have to work with to ensure a proper transition. We can also then see who might qualify for the position when the retiree leaves and work to properly prepare them. It’s also important to have regular follow-ups with your aging workforce so that your planned transitions remain on schedule.”
Guiding Questions for Succession Planning
- What is needed to reach the company’s goals?
- What are the skills, knowledge and experience the company needs to flourish in the future?
- Who should be identified to gain that knowledge and how can we provide them the opportunities necessary to get it?
- How long do we have and what resources are needed?
- Has the business adopted and implemented the necessary processes and procedures that eventually facilitate a smooth transition?
- Does the business have the necessary management level talent in place to be successful following a transition to new stakeholders?
- Does a transition to existing stakeholders make sense or should the business look to transition to an outside unrelated third party?
- What is the priority of importance so scarce resources are allocated appropriately?
- Who is responsible for each element of the plan and how will they communicate progress or setbacks?
- Have a team of advisors been established and are they in full communication on the plan?
Don’t Procrastinate on Succession Planning
“Succession plans aren’t simply intended to address positions held by older employees. They are also intended to address critical positions held by non-retirement-aged key employees,” reminded Jim Bitterle, managing partner for EDSI. “It is easier to predict when older employees may depart. However, the departure of critical employees, who are not near the retirement age, can be highly unpredictable. These departures, depending on the importance of the position, can have a devastating effect on an organization.”
Because of this, waiting on your succession plan could be the worst thing you can do for the long-term survival of your business. Succession plans should be considered a living document that is worked on in the present but regularly reviewed whenever personnel or organizational structures change.
“If you wait to develop and implement a succession plan you are severely limiting your odds of success, often to no more than a strategy of hope,” said Maner’s Theis. “You may need to hope your company can replace key talents quickly or a potential buyer won’t discount your value too much because decades of talent exit the business when you do.”
Put another way, your plan will surely change over time but, by continuously working on elements of succession and having built-in flexibility, the concentration of effort at any given time will be reduced and the ability to manage it will increase through experience.
When creating a succession plan, remember, the future of your business is at stake. Take the time to do it right, place a level of priority to it and consult the necessary attorneys, CPAs, financial advisors and other key stakeholders.
“Having a strong team of advisors to assist with tax and legal considerations are essential,” said Theis. “No matter who is on the team, it is vital the communication occurs regularly and begins well in advance of the transition. By committing to the transition process years in advance, each individual’s development can increase over time and improve the overall effectiveness of the entire process.”
For more information on developing a succession plan that builds the best possible future for your business, access the MMA Industry and Associate Membership Directories to contact MMA’s leading industry and associate members.